Does Renting Make Sense?

Writing Your Money: The Missing Manual has been intense. I’ve spent a ton of time researching personal finance topics ranging from buying a car to funding a 401(k) to the relationship between money and happiness. My research has reinforced some of my convictions (index funds are the best investment for 99% of personal investors, for instance) but has toppled others. One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.

Advantages to renting
In 2007, Tim Ellis shared a guest post with GRS readers about the realities of home ownership. “It’s a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits,” Ellis wrote at the time. I didn’t pay much attention (because I was in London!), but I now believe he’s right. Yes, homeownership makes sense for some people. But there’s no shame in renting; in fact, for many folks, that’s the way to go.

The housing industry is huge, and it spends a lot of time propagating certain myths about homeownership, myths like:

If you rent, you’re throwing your money away.

Owning your home is a forced savings plan.

Home ownership is a path to wealth.

My own research shows that over the long term, housing prices (and gold prices) barely outpace inflation. In fact, since 1926, home prices (and gold prices) have returned about one percent above the inflation rate. That’s hardly a good investment. (Stocks have averaged about 6.8% above inflation!)

There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability (you’re not at the mercy of a landlord) and freedom (you can do what you want with the place). But financially, it’s not usually the best bet. (It’s true that you build equity, but you do so at a very high cost.)

In an editorial in the June 2007 issue of Kiplinger’s Personal Finance, Knight Kiplinger wrote, “It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes.” And there are other advantages to renting.

For one, you have flexibility; you can move at a moment’s notice. For another, you’re not responsible when things go wrong. If the shower starts leaking before you leave for your vacation in Duluth, you don’t have to worry about it — you call in the landlord.

Still, this is a personal finance blog, so let’s look at some ways to examine the decision to rent or buy in a financial light.

Renting by the numbers
One way to tell whether it’s better to rent or buy is by checking out the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio isn’t too tough. All you need to do is:

Find two similar houses (or condos or apartments), one for sale and one for rent.

Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.

For example, say you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block for rent for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7.

But what does this number mean? Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting.” That’s \a little opaque, but what Leonhardt means is that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.

During the housing bubble, the national P/R ratio came close to 20 (and went far above that in some cities). In other words, you could rent a $200,000 house for $10,000 a year (or just over $800 per month), which is a pretty good deal.

The normal range nationwide is between 10 and 14 (meaning it would cost between $1200 and $1600 to rent a $200,000 house). During the 1990s, just before the housing bubble, the national P/R ratio was usually between 14 and 15 (about $1100 to $1200 to rent a $200,000 house).

Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.

These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)

Note: I’ve shared it before, and I’ll share it again: The New York Times has a great rent vs. buy calculator that can help you decide which is best for you. Just plug in the numbers for your situation, and the calculator tells you how long it would take you to break even if you bought a house.

Home sweet home
Despite the results of my research, I’m not about to sell our house. The thing is, there’s more to this decision than just the numbers. As I always say, money is more about mind than it is about math. Our financial decisions have more to do with our psychology than with the numbers.

Kris and I are happy in our drafty old house. We love the vast yard that gives us space to grow a vegetable garden, blackberry canes, and fruit trees. We love the uneven floors, the outdated kitchen (everything’s from 1950!), and the zillions of windows. It may not make the most financial sense, but there’s more to happiness than just money.

We’re not about to move, but you know what? If I had it to do again, I’d never buy this house. If we had stayed where we were, we’d now have just four years left on our mortgage. But knowing what I know now, I might even be inclined to rent. For most folks, renting isn’t a bad option.

Note: This post contains bits and pieces that have been discarded (and some that haven’t!) from Your Money: The Missing Manual. My final manuscript was much, much too long, and we’re going to have to cut a lot of stuff. This makes me sad, but it’s not a complete loss. I’ll be able to share some of it here at GRS!

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I definitely don’t think renting is throwing money away – but it some areas, like mine, it most certainly is. Our miniscule one bedroom apartment in northern Alberta costs 1100 per month (rent raised 50$ in the past six months. no cap here. People have had their rent raised 500$ a month), and renting a house?!? HA! A 200,000 house would cost 2500-3500 dollars. I’m expecting a baby this year unexpectedly, and thanks to “adult building” laws, I now have to find somewhere that allows children. 1250 will be the bare minimum for a two bedroom, won’t be surprised if we end up with 1300-1400.

Words cannot describe how much it bothers me when people act lik housing is an investment to everyone. I would give anything to be able to afford a mobile home and live in it for twenty years, not be at the mercy of the greedy people known as landlords in this horrible city, spending easily 5x the cost of the unit.

The problem here is there is no affordable housing. None. People also think that if they’re not making their mortgage payment plus an additional 100-150% profit (yes taxes are high, not THAT high) it’s not worth doing. If a person pays 1200 a month mortgage, they then Rent their basement suite for 1600. so… Free housing, equity building, and cash profit. Must be a nice life.

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Palm Shadows

Renting and buying are completely dependent on time and situation. If there are any uncertainties, renting can be a great way to go. Thanks for sharing.

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Jenny

If you are planning for the investment purpose only then yeah renting is not a better idea, it totally depends upon for what purpose you are planning for the property to live or to rent.

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Carolina

Great tips, the P/R ratio is a great tip! We currently moved to Italy and found couple of places, and using P/R ration identified the best to rent and not to buy. Thank you!

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Andy

Another issue not address is that in many large cities condo ownership is the only realistic manner of buying real estate. Owning a condo can be a nightmare for many reasons (crazy neighbors, crazy boards, too many foreclosures, too large or too small assessments, lack of maintence…). I would never recommend that anyone own a condo.

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Wendy

I am happy that someone agrees with me that homeownership is not always the best option. Often people fail to add in utility cost, which you can never get back. Add at least 200.00 per month for 30 years’ its a small fortune. I quickly ditched my house and I be been able to save 20% of my income ever since.

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Ednasmiley

Just bought a house. It’s p/r ratio is 5.65, it’s 10% less than I earn in one year and monthly piti is 53% of prevailing rent. Winner!

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Muu

The P/R calculators are ridiculous when you think about it: when you’re renting, most likely you’re not going to rent as much house as you’ll buy. The drive for more rooms, more yards, changing this and that in your castle flies in the face of living within your means and frugality, and most likely means that you’ll end up spending more (“oh I’m investing!”) vs if you only treat it as your living quarters.

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Teresa Warren

I don’t get this at all. What about the benefit of paying off the mortgage, hopefully by about age 50 if you finance well and make a few extra payments. Then you are data huge financial advantage and can really focus on retirement. Of course we do most of our own home repairs so maybe that improves our cost of ownership. I say buy young, finance for 20 years, and plan for a future with no mortgage or rent.

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captainhurt

paying off a mortgage is NOT a “benefit”. it is the final action in eliminating the massive, often life-long LIABILITY(debt).

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Angie and Barry

My husband and I have raised all 3 of our children. They are now gone with their own families. We are seriously considering renting a luxury apartment for the convenience of not worrying about fixing stuff and to be modernized without spending too much of our money. We are in our middle 40’s. is this a good idea?

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Bob L

I am just a commenter, but in my opinion, there are too many unstated variables. Do you own a house? How big? What kind of income? How much left on the house mortgage? Etc, Etc, Etc….

You have to really sit and look at the numbers, and look at what you want, and look at what your other options are. I personally would not like owning a house. I would only do it if there was a big financial advantage. Others really like owning a house, and would do so even if there was a big financial disadvantage.

I am assuming that you currently have a big house that is mostly paid off. If you are already in this position, then you would “probably” be better off looking for a smaller house in an area with lower taxes. BUT, and it is a big “but” there are so many things to consider. How stable are your careers? How long do you plan to stay in the area you are currently living? There are too many questions to ask.

I have done the numbers for myself and others in various areas over the years. Financially, it “usually” makes sense to own if you will be in a place for a LONG time. But that is generally is comparing owning a home compared to renting a home or apartment that is comparable. When you compare a small apartment or half a duplex to owning a big house, the numbers usually skew towards renting. BUT (there’s that but again) if you compare a small house in a cheaper area to a luxury apartment, the house starts looking good again.

Figure out what options you would consider, what pluses and minuses there are for each option, and estimate the numbers. Then take time, a LOT of time, and discuss it with each other, and maybe others. Quite often we get hung up on our own wants and miss some huge Plus or Minus that others see. Some costs that we did not figure on.

For example, my sister wants to sell her house and temporarily move to an apartment nearby before eventually buying a house somewhere south. When she, my brother and I get together, we are all pointing out things that the others did not think about. There are some options that I think would be good that she would not even consider. So…… This is a very personal decision that can be helped along by others.

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cory

My friends make fun of me for renting furniture but i personally couldn’t care less, thanks for this

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Sasha

If I focused only on financial reasons, it still is better to buy than rent in my area. While paying rent, my husband and I were “lucky” to find a 1200 square foot house with no yard for $800/month. Similar properties rent for around $1000-$1300/month, but the owner lived out of country and mostly just wanted the house to remain occupied. We bought a house awhile ago that is perfect for our needs and is 2300 square feet, well taken care of, updated, and with a decent sized yard for the area and a 2 car garage (unheard of in my area, many houses have NO parking even out front). And even better, our mortgage, house insurance, life insurance, property taxes, garbage & sewer cost us $649/month. Yes, $151 cheaper than rent, minus hassle of landlords, inability to make changes to the house, rising rent rates, and plus the fact that in 17 years (we chose a 20 year mortgage) we will never have to pay rent again, only property taxes and garbage/sewer once per year. I agree that some people work better with flexibility of renting, but both my husband and I have family in my town so we have roots here and plan to stay. I also get that not everyone is able to find a mortgage payment lower than rent so they’re in a financially different state than me. In regards to utilities, they were not included in the $800 rent, and are cheaper in the house I own b/c of better windows. In regards to repairs, I am lucky to have family that are electricians, plumbers, carpenters, so that cuts costs a lot, though I realize I am fortunate to get free labour and most should think about how the cost of repairs could affect how much cheaper buying than renting is. good luck anyway you choose to live and where. I think the top reason for buying for me was 30% financial and 70% stability (I wanted to own a place before I had children, etc).

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Bob L

Glad it worked out for you. My personal views are that you should buy a house because it is the best decision for you, not because someone say’s it’s a good investment, or what you MUST do. When the decision is between buying a house and renting a house in an area you plan to stay in, buying often wins out. If the choice is between renting a small apartment or buying a house, renting often wins out. When I first moved into the general area I live in now, I had enough money for a down payment on a house. this was back in 1998 or so. House prices were very low, as were interest rates. I was not sure of the exact area that I wanted to live in. By the time I had decided, the house prices had gone WAY up. In one year I saw some of the houses I had looked at listing for TWICE what they had been. They are still way higher than when I was looking so if I had bought right away, I would have done quite well. But I would not have been happier.

I invested my downpayment in a stock based mutual fund. I calculated how much a house would cost me, with insurance, repairs, loan etc. Then I took that much money out of my pay check. Of this money, what was not used for apartment costs went into the fund. When house prices went up the next year, I increased the amount, but increased the amount only a little through the years after that. I can now buy a house using that fund.

For those that are not sure whether they want a house now, or are not sure where they will end up, this is a good strategy. It also helps you figure out whether you can really afford the kind of house you thought you wanted. Each area is different, and lots of conventional wisdom is wrong or outdated.

It used to bug the heck out of me when people would say I needed to buy a house “for the deduction”. I calculated out the amount that I could have deducted, and it came out just slightly more than my standard deduction at first, and would have been overshadowed by the standard deduction in no time.

BTW, I currently rent one side of a duplex. It costs me slightly more than if I had bought a house back a year after I moved to the area. BUT, I don’t have to plow, shovel, cut the grass, fix anything, and if things get tight I can move into a place a quarter the size and be happy, but since I was able to sock away so much I have a lot of flexibility.

I have known people through the years that said they were planning to buy a house. BUT, they move into an apartment much larger than they need. They spend every spare cent having fun with no savings towards a downpayment. Some of these people did buy homes, then lost their homes, or got divorced because money became a serious issue. Too few people look forward far enough to prepare properly, and even fewer people look at the present to see what they may be doing wrong.

In my opinion you did everything right for the right reasons. We need more of that in this world.

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Christina

Thak you SO much for posting this! I am a renter, and everyone around us keeps pushing us to get into our own house because we’re “throwing away money” every month. The fact of the matter is, we have not even been married for two years yet, and my husband is still in school. We have no kids, and we want to save our money to put down as big of a down payment as we can afford.
Right now, we’re happy renting, and the bottom line is we can’t afford a house just yet. This post is great because it’s honest.

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David

Financially renting could be a better option but in my opinion owning a house is much better because when you get old and you are not able to work you will not be able to pay for rent. 😀

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Bob L

When I moved to my present area about 13 years ago the prices of houses were very low, and interest rates were also low. I had enough for a 20% down payment on any house I would have been interested in. I was going to buy, but unsure of how stable my job was going to be location wise. Prices went up dramatically within a year of moving to this area. Instead of buying, I figured out how much a house would cost me with mortgage, tax, upkeep, heat, electricity etc, and just took that much out of my pay each month. What was not used for costs of renting (including utilities) went into an index mutual fund. When the stocks were at their peak, so were house prices. I had almost enough money then to buy a house cash. Now that the market for houses (north east US) is down as well as the stock market, I more than enough money in my account to buy a house cash. I will continue this practice for as long as I have a job. I expect I will always have enough money to either have the apartment I want OR the house I want.

Meanwhile, a friend of mine just paid of his mortgage. His taxes and upkeep are costing him about as much as my rental costs are. I don’t have to cut any grass, or fix anything. Sure, his place is larger than my apartment, but the apartment is much larger than we need.

BTW, I am currently 48 Y/O

Bob L

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Jessica

Thanks for writing this article. I am contemplating buying. I moved into a relative’s home so that I can save money to buy. The bad thing I found with renting is your rent does go up (I am sure that’s nothing compared to the cost of a home). The bonus like you said in your article is… the landlord will fix something if it is broken. The reality is the bank owns your home until it is paid off.

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HomeOwner

I think the article is too one-sided. I wish to highlight some points here which should be considered before you by a home. Buying a home is more about quality of life.

Are you not happy with your rental home (or the quality of life in there)
Is your family expanding or do you have kids
Is your Job stable ?
Do you have a nest egg built or are you in the process of building one
Can you put down 20% of the home
Would you have cash enough for atleast one year of mortgage payments after you pay downpayment & Closing
Is your credit history good enough (above 750)

If you answered Yes to all of the questions above, you are in great shape to buy a home and you should buy one in a very good school district.

Home owning involves some responsibilty, people who do not want responsibility should never buy a home. Also it makes you feel worthy, confident and you are surronded by like minded people where your kids would grow up and have friends who live there for long.

Renting works best for instable people, whose marriage will not last.. will not be in a job for long and have no control over your finance.

Who said moving out of a rental home is easy.. People who tell this have no idea about the lease breakage clauses. infact you can get out of your own home much faster than a rental home, becuase you can let it for rent or list it anytime.

Take control over your life and live it to the fullest in the best way you can. be it rental or owning a home.

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Mike Choi

Just because a house appreciates does not make it an investment. Maintenance of a house does cost time and money so if a house does appreciate, the profit may not seem that great once you factor in maintenance cost and YOUR time.

Where as when you are renting you simply pay rent and not worry about stuff breaking. Thus providing you with more time and flexibility.

In the end it’s very hard to compare the nominal rent payment to a mortgage payment. It’s all about need, If you have a family a owning a house makes more sense, but from a pure investment standpoint. It’s better to stick the money in the market unless you can find a fixer upper and willing to do most of the work yourself.

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Kaye

My parents are 70+, on very fixed incomes, and probably only a few years left of guaranteed part-time work. They rent, and their rent goes up pretty much every year. This one example alone is why I will make sure to have my own mortgage in place by that time in my own life — whether or not the place is paid off, at least you know what the monthly amount will be for the rest of your life and can plan accordingly (and not have to cut your meds or anything else because of it). Also, how else to get enough writeoffs to itemize on your taxes?

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MRS

I am certainly glad there are so many of you renters. You are my favorite people because you have been paying the mortgages on my rentals for the last 6 years. In a few years my tenants will have paid off my rentals for me. Thank you.

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D. Gates

Amandeep (#243): If rent is cheaper AND you invest the difference, then it’s not a -100% return. Also, keep in mind that you never see a dime of the money you spent on the mortgage ever again.

Shara (#204) brought up the point I was thinking as I read through these comments. What about renting and investing, then buying the house with cash? You can own a house without paying a mortgage, and you can work towards ownership while renting.

If the average monthly cost of renting minus the return from investments is less than the monthly interest payment on the mortgage, then renting actually lets you put more towards home ownership. In this case, renting lets you truly own a house and be rent-free faster than you could by “buying” a house outright using a mortgage.

It also makes sense to me to start out small if you’re going towards ownership. If I can own a residence a few years earlier by getting a smaller one, then I can start putting ALL the money that would go towards rent or mortgage into saving up for a larger home, and I’d be earning interest on it as well.

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Amandeep

When you rent, you get a -100% return on your money, meaning you never see a dime of the money you spent on rent ever again. If you buy a house and if it stays 1% ahead of inflation, you get a 1% return on your money. Even if it ends up costing you that 1% or more in maintenance, let’s say maybe 6% of the cost of your home, it’s still a -5% return.

I understand why renting may make more sense depending on the housing market in your city or based on your future plans for staying in the area (or not staying in the area).

But from a purely financial perspective, in general it should be better to buy if you can afford the mortgage, taxes, insurance, and maintenance. In what world is a -100% return on your money better than -5%?

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LMoot

Renting makes cents. Buying makes dollars 🙂

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Terry

Does renting make sense?

It does if you have no other options.

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LMOOT

Inflation isn’t the only way for property values to rise. I bought a 79k fixer upper in Florida 6 months ago. Through buying quality materials on sale little by little I’ve raised the value of my house about 10k investing only about 1k so far. After putting 20% down I’m already ahead of the renting curve since my house payment (mortgage, taxes, insurance) is several HUNDRED dollars LESS than rent of an apartment in this area. It won’t always be a fixer upper, but my monthly house payment will always be much less than rent, and under the 600 dollar mark for quite some time. tax inflation or no. Mortgages don’t always have to be more than rent. If you’re willing to put in a little sweat equity you can make the investment more profitable than mere inflation, and you can start off with a lower payment than rent. I understand thought that this is simply not possible in a select few areas of the country.

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Dollars Not Debt

Renting definitely has it’s place. Too many young people think they are ready to buy a home yet they are not even ready to be grown up enough to cook a meal. I am a firm believer that a house will not make you money. All it will do is allow you to live in it relatively cheaply. After you factor in the interest you pay for the loan, the real estate taxes, the upkeep, the improvements, the yard work expenses, etc.. in the long run you will at best (assuming it goes up in value) break even. Yes, definitely better than renting your whole life, but not a very good investment. In my blog I talk about my life & my debt.

Dollars Not Debt

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Eric Franke

Agreed. Appreciation on a home will never come close to the 7-8% your money would earn in mutual funds. It really comes down to the rent vs buy calculations, which there are several good calculators on the web for this.

I’m not convinced that buying a home should be done for the money, as often times it is a poor way to try to get wealthy. You make the decision to buy a home for reasons other than money: quality of life.

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Honey

If your home is not paid off, you are not “paying yourself” to live there. You are paying the bank. And the closer you are to paying off your house, the harder they will try to foreclose on you, because that’s more money that they can make.

I also realize that I must have been really lucky with landlords, because I think in my 10+ years of renting I had the rent raised on me ONCE when I renewed, and it was raised less than $2 (which seemed silly to me but there you have it). The rest of the time once the initial lease was up it either went month-to-month on the terms/price of the original lease, or was renewed at the same price.

My boyfriend and I have talked about buying outright once we retire. That’s the only way we’d feel comfortable buying, because there would never be any point where someone else would have a financial stake in our home but us.

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Craig

Personally despise renting, to me it really is throwing money away. you rent for 10 years, that is several thousand dollars you have given to someone else to own your home..Why pay someone to own your home when you can own it yourself and spend a few dollars and hours on yardwork..If you’re moving from place to place renting makes sense but renting the same house for years..come on people.

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Eric Franke

This very article explains how “throwing money away on rent” is a myth.

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Sam

Both sides have their pluses &it depends on what you want in life. Even though I regret the specific house I bought, at this point in my life owning makes more sense – I want/need a gardens for mental & food reasons. I want to be able to to do & fix things without asking permission or waiting months.
When my house is paid for I’ll get an acreage with cash. I’ll keep both & when I’m old enough arthritis kicks in & such I’ll move to an apartment and rent out the house & if possible the acreage to add to my retirement income.
Everything but the farmers market is within distance for me to do. I don’t like how dirty, expensive & loud it is downtown but maybe when I have grey hair I’ll be able to ignore it more…

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Stu

I’ll reiterate what some others have pointed out, regarding the overall cost: a mortgage payment does not go up every year or so like rent does, which means that one day I can look forward to easily affording my $1100 mortgage payment when the average rent will be several times that. My parents are still complaining about their $600 mortgage payment now, even though their home close to paid off, and even though, if they were to rent the same house today, it would almost certainly cost them twice that!

Also, a lot of folks have been saying how glad they are to rent and not have to spend all their free time and money at Home Depot. Oh please! It’s not like things fall apart constantly and your home requires nonstop maintenance and repair. Most everything I can think of that you do to a house can be expected to last at least a decade or much more. Don’t want to do it yourself? Hiring a professional to do it right the first time is nearly as mindless as calling the landlord and usually ends up paying for itself in the long run.

Sure, sometimes I do miss the flexibility of renting, but considering that they raised my monthly rent by about $50 each year the last few years I lived there, I don’t feel too bad about paying the extra for a home and not having to worry about disturbing the neighbors through the paper-thin walls.

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Jonasaberg

I find all this talk about “in the end” a bit odd to be honest. In the end we’ll all be dead so it doesn’t matter if you own stocks or a house. Well, maybe to your children who will inherit everything, in which case I suspect stocks are easier to divide.

Life surely can’t be about what you own in the end but more about living your life to the fullest. I am sure you can do that both renting and owning.

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simplistic thoughts

This is a great write up. Growing up I always used to think that I had to buy a house. But the more I considered what it would actually cost compared to renting, it just doesn’t make a lot of sense in most cases.

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impressions

@ Mr. L
pretty good example.. this is exactly what i mean with my previous comment. At the end, you owned the house and you can do whatever you want to do with it. You could even earn from it by allow somebody else to rent on it if someday you decided to go move somewhere else. 🙂

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JMK

We “own” the difference between our 185K mortgage and the ~$500k value of our house. We expect to pay off the mortgage in 10yrs (or less). At that point our kids will be gone and we really won’t need our 3000sq feet and 3acres in the country. Without the mortage we have $1100/mth of property tax, utilities and insurance. That doesn’t include maintenance which at 2% of the value of the house is another $833/mth. Those costs will only go up and they’ll never go away. I’m thinking that in 10 years the house will probably be worth more and the tax/utilities will be higher. At that point all we’ll really need is a small apartment which we can easily get for the same as our tax/utilities on the “big house”. True a small appartment and a 3000sq ft house aren’t comparable, but for the same monthly expense I think I’d rather free up the half million in equity (or more by then) and fund the extensive travelling we intend to do. Downsizing our lives will also mean one car, no house repairs, no snow removal contract, no lawn tractor for the 3acres of grass etc etc. Owning a country place has been wonderful while we were raising our kids, but I’m already counting the days when we cash in and get the equity out of it for the next phase of our lives.

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JK

I like this article. I am single and moved to the US five years ago and did not intend to buy a house since I did not want to live there for more than five years. I rented an apartment in a safe and cheap rent controlled area and my friends laughed at me and were pressuring me to buy a house. Well fast forward – I am on assignment to another country for one year with a possibility of extending. What would have happened had I bought a house? Instead, I saved some of my money and spent the bulk of it building my dream house back home in Africa. I am happy I lived my own lifestyle and not that of someone else.

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Lili

We just sold our townhouse after 1.5 years of trying to sell. We ended up having to do a short sale, since I became ill and unable to work, we could not afford the mortgage. We bought at the peak and sold as prices are still declining. We are now renting a home (no common walls, no psycho neighbors!!) for $1100/month LESS than we were paying on our mortgage. I wouldn’t buy a house now even if we could (it takes 2 years after the short sale). Getting stuck in that place was a nightmare and I’m thrilled to be a renter now…

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David

The best thing about renting happened yesterday. The shower faucet has been balky for months, and finally would not shut off yesterday. Sure, I’d complained about it for awhile and my landlord is either lazy or in deep financial doo-doo (I suspect the latter) because nothing happened. Anyway, I called him and told him what happened, and went to work (leaving the water running), and it was fixed when I got home that night.

The worst thing about renting is, if it was my own place, I would have already replaced all the cheap plumbing fixtures and other stuff with quality ones, but it’s not my problem.

Also, my rent now is more than a mortgage on this older condo — in a very cool old building, though — would cost given the decline in value, so I’m fixing to move this summer if I can find a better deal. My rent/buy ratio here is only 11.something, but I will never buy a condo again.

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john

I would argue that you should also consider the cost of rent alternatives in the area. For example: in my neighborhood, the rent on a 3 bedroom apartment is 1500 and above. While my mortgage in a house down the street (with significantly less crime) is 1100. There aren’t any houses for rent in this neighborhood.

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The Broken Penny

@220 (Honey): I agree. But that type of detail will never be available for analysis.

@225 (Dan): Those stats were not to prove that home ownership makes you rich. It to show that renters are not taking advantage of the extra money they save by not paying a mortgage. In order for renting to be a better deal in the long run everyone here has agreed that you must be investing the extra money saved by not paying a mortgage. Clearly, renters are not doing that. Therefore, most renters will continue to pay rent and have little to no investments to help pay rent after they retire. It’s a nasty cycle. Home owners will own their house when they retire, so they don’t require as much income. Renters without investments or a paid off residence will have skip retirement to pay their rent.

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Dan

@218 (The Big Penny):

But none of that disputes the point I raised about causation and correlation. Some people are trying to infer that owning makes people rich — the only thing that I see is that rich people own. The data found in your link supports the theory that generally speaking, people who own are better off financially than people who rent. There is NOTHING in the data that you reference that can lead one to conclude that owning in and of itself is what makes people rich.

Don’t believe me? If ownership in and of itself made people rich, we wouldn’t have the housing/foreclosure crisis that we do. Which leads me to reiterate what I already said — people who are better off financially own, and people who aren’t, rent. Buying a house tomorrow doesn’t make anybody any more richer than they were today.

Also, to support my hypothesis that those who own have their financial act together in the first place, consider this: Where I live, a townhouse costs $350k. If you need a 20% down payment, that’s $70k. For an FHA loan with 3.5% down payment, that’s $12,250. Tell me how the generally less well-off renters are going to save that kind of money and become rich overnight. (They can’t.)

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mike

We just bought in Oct 2009. Based on the rentals in the neighborhood, I figure my P/R ratio to be 12.9. We also bought with 20% down in cash, and the total price of the house was 1.83 times my income. With two young kids, I’m happy with the decision to buy; for financial and non-financial reasons.

That said, I rented in San Diego from 1998-2005, and watched prices for homes (and rents) go through the roof. Renting was expensive, but I’m sure glad I didn’t try to buy during the latter half of that timeframe, because I’d be kicking myself now.

It really is a “what works for you” situation.

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Suzy

Those of you who see renting as worry-free must have really amazing landlords. I worry constantly that the owner of our rental house will stop making mortgage payments, drop by for a surprise inspection, not give us our security deposit back, decide to occupy the house, etc etc etc. Whereas with the house we’re buying, following several very good inspections (including a professional seismic inspection), I’m not at all worried about what owning our new house will bring. We’ve owned before, so I know what to expect, and since we’ve already got a great all-purpose handyman on the speed dial, the only difference maintenance-wise is that we’ll be paying it up-front instead of in the rent. Seems pretty worry-free to me! 🙂

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Lars

@Honey: Agreed, and that statistic also doesn’t say anything about correlation or causation. Are homeowners just able to buy a house because they’re “better with money”, and not better off because they bought a house?

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Lars

@Kevin:
True. It’s as absurd as assuming that the housing market will have the same level of appreciation it had in early 2000. Unfortunately, we can’t predict the future, so we have to look at the past for an indicator of what might happen. But that’s not my point, my main point is that a lot of people make mistakes when running the numbers. There’s a social and financial stigma for renters in the US which is not justified.
I’ve had co-workers tell me “I wish that someday you’ll be able to own a house”, or when I applied for a credit card, the agent called me, asking “So you make $100,000 a year and you RENT for $1,425 per month”?

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Honey

One wonders if the percentages of investments for the categories of homeowners versus renters are artificially inflated due to the disproportionate percentage of renters who are, say, under the age of 25 and still in school.

I would like to see those same percentages reworked so that everyone was at the same life stage – i.e., the percentage of renters v. homeowners of whom all are 30 years old or more with 3+ years of experience in their field.

In other words, it doesn’t mean anything to say that only 26.2% of renters have assets in retirement accounts if 73.8% of renters are full-time undergraduate or graduate students that do not have jobs with benefits. I have a PhD in the humanities and currently manage PhD programs in the social sciences, and the average graduate student makes about $15K per year and at least half of them are actively borrowing (student loans) since their salaries aren’t enough to live off of in a major city like Phoenix.

The statistics hide a LOT.

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Marie

You can (and should) crunch all the numbers, but a lot of it comes down to lifestyle.

Someone who finds repairs and maintenance a hassle and has to hire out would probably prefer to rent, and let a landlord deal with those problems. A DIY-er tends to take comfort in their own workmanship and choosing the supplies, and might enjoy keeping up a home.

Someone with outdoor allergies might not care to have a yard, and may prefer a rental or townhouse with hired outdoor help. A nature buff who wants to own energetic dogs probably wouldn’t be happy without a house with a big yard.

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The Broken Penny

@210 (Dan): If you look at the bottom of page 16 on the link I posted in message 145, you will see that it says percentage of family’s invested in stocks, bonds, ect. It makes no judgment on how much money families are investing in those areas, only that they are participating.

25.8% of home owners hold stocks while only 9.1% of renters do.

60.2% of home owners have assets in retirement accounts, while 26.2% of renters do.

So while I agree that total dollar comparisons may not be fair, % of renters investing vs. % of home owners is a fair one. There is not one category of investment in which renters outpaced home owners.

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Kevin

@Lars:

“The average annual return of the S&P 500 from 1980 to the end of 2009 is a whopping 11%”

All that proves is that if someone were facing this decision 30 years ago, it turns out renting and investing would have been the better decision. I definitely does not mean that the same conclusion is true going forward for the next 30 years.

What I’m saying is, it is absurd to assume that the markets will continue to generate 11% cumulative returns for the next 30 years. The smartest minds in the industry have already warned that the bulk of the growth is behind us, and we’re in for a very long period of depressed returns. I believe Warren Buffet is projecting between 5-7% real growth, optimistically.

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Lars

@Shara:
I totally agree that the scenarios can play out totally different if the variables change. I’m just allergic to people saying that owning is ALWAYS better, since after you paid off your mortgage you’re living in the house for free.
There are a few reasons for this:
– People underestimate the power of compound interest
– The mortgage obfuscates what’s really going on
– People just compare monthly payments instead of looking at the big picture (like you did in your initial calculations)
BTW, I took my annual interest rates from this nifty calculator: http://www.moneychimp.com/features/market_cagr.htm
The average annual return of the S&P 500 from 1980 to the end of 2009 is a whopping 11% (not adjusted for inflation). And I’m not sure that this would be a riskier investment than buying a house, as someone else stated. After all, you put all your money into one physical good, whereas an investment in the S&P 500 is quite diversified across industries.

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Honey

@Kevin,

I was not thinking of it in those terms. But if you’re counting owning a house as a “safe” but low-yield investment like bonds, then you should include your housing costs in your overall retirement investments, figure out what percentage of your investments housing costs are, and then rebalance the rest of your portfolio so that the overall percentage of low/high risk is what it should be given your age.

Of course, no one would do this. And that’s because houses are never investments, they are places to live. So far no one’s convinced me that owning a home would be a good investment for me (though I never argued with the fact that they might be good for some people) because I can’t imagine living in the same place for more than 5-6 years EVER.

One thing that intrigues me about the “forced savings” argument – why is this so laudable if it’s a house but if you say that you adjust your withholdings so that you get a tax refund every year, every PF site everywhere tells you that you are a horrible lazy person?

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Ivan

I think it dose not make any sense to buy a apartment or home, renting is the best option; the main benefit of renting is you stay worry free.

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Shara

I would also like to point out, the landlord rule of thumb is you should be charging 0.75-1% of the value of the house every month for rent. If the rental market is too depressed for that then you either have to settle for a low rate of return or pass on the investment. So with Honey’s example:

“if you put 20% down towards a house (let’s say $40K, since the average house is around $200K at the moment) and I put the same exact amount in an index fund/IRA and sit on it for 30 years, who has more money at the end? “

With all other assumptions valid (0.1% expenses, 0.1% escrow, 7% loan, etc) if one puts down 20% ($40k) on a $200k house and rent is 0.75% of the value ($1500). You break even at the get go (P&I+escrow+expenses= $1464.50) and sell the house at a profit after 5 years. I don’t think it’s a coincidence that this aligns with the rule of thumb for buy vs sell.

@Dan

So you’re right that risk is a consideration and one is comparing apples to oranges, but even with the down payment invested at 8%, after five years you come out better with the house.

Hence I’ve just made a circular argument, agreeing with JD that it really depends both on your personal situation and the ratio of rent to purchase price.

But no, in a stable market with rent achieving the ratio referenced above, it doesn’t make sense to rent in perpetuity.

I would like to point out that the break even really depends on the down payment, which really to me is what a landlord is being rewarded for. S/he puts her/his money on the line in the form of a down payment, and the renter that can’t afford a down payment for whatever reason winds up paying a bit more for housing, especially over the life of a loan.

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Dallas Pottinger

For the many people who stay in one home for most of their lives, one thing does remain true: If you pay rent for thirty years, you have nothing. If you make a house payment for thirty years, you have a house.

If the house payment for mortgage, taxes and insurance is reasonably close to the amount you would pay in rent for roughly the same residence, then no amount of comparative calculation can remove the obvious advantage of owning. It is only when a monthly rent payment is much, much less than a house payment that renting may begin to make sense — at least, for those of us who don’t expect to move.

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Nicole

Income isn’t wealth.

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Dan

@208 (Alexandra):

As I pointed out earlier, perhaps this is a case of correlation does not imply causation?

My net worth is in the negative, and I rent. Owning a house wouldn’t change that.

If I had more money, I would own instead of rent, despite the fact that owning costs me more. So maybe you have to be more wealthy to own in the first place, and the poor people rent?

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priehl

Renting is great! As long as you can get everything you own and want to keep out of the house in 20 minutes, which is how much time you might have when the Sheriff comes to enforce foreclosure, which your landlord somehow failed to warn you about.

Sorry I don’t have the link to the video I saw of this process in Henderson County, Nevada. But it’s a little economic wild card to figure into your calculations.

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Alexandra

Why don’t we let past performance tell the tale – who is richer: homeowners, or renters?

“The Federal Reserves Survey of Consumer Finances has consistently found a huge gap between the wealth piled up by homeowners and that accumulated by renters.

– With an Annual income of $80,000 and up, Owners have an average net worth of $451,200, while Renters are worth $87,400.
– When your Annual income is $50,000 to $79,999, Owners are worth $194,610, Renters are worth $25,000
– When your Annual income is $30,000 to $49,999, Owners are worth $126,500, Renters are worth $10,600
– When your Annual income is $16,000 to $29,999, Owners are worth $112,600, Renters are worth $4,240
– When your Annual income is Under $16,000, Owners are worth $73,000, Renters are worth $500

Source: VIP Forum, Federal Reserve Board”

Its pretty consistent, even for people making very little money. Homeowners are wealthier than renters.

So the only question is why.

My guess is that it leads back to that “myth” that JD talked about in the article, which may not be a myth after all. A mortgage is forced savings. While the majority of renters might have the intention to save the difference between their rent and a mortgage on a similar property (over and above what they should be saving anyway, in order to match the homeoweners), it’s quite apparent that they don’t.

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Kevin

@Honey (#177):

“I’d rather pay taxes on an investment portfolio of index funds yielding between 6-8% over 30 years than come out even after inflation, which is the house scenario.”

Honey, this is a little silly. You’re talking about completely different ends of the “risk” spectrum. Housing has a relatively low rate of return because it is relatively low risk. Bonds give a slightly better return, for slightly more risk. Stocks, an even better return, for still more risk.

By your logic, nobody should invest in anything other than stocks. You’re implying that a 60/40 stock/bond mix is silly, because why would anyone waste their money investing 40% of their portfolio in bonds returning 4% when they can just go 100% stocks and earn 6-8% on their whole nest egg, right up until they die at age 95?

Do you see why that’s silly? You need a mix of risk in your portfolio, and real estate provides a low-risk component, accompanied by the commensurate expected lower returns.

“if you put 20% down towards a house (let’s say $40K, since the average house is around $200K at the moment) and I put the same exact amount in an index fund/IRA and sit on it for 30 years, who has more money at the end? “

Irrelevant – who took more risk? And the problem is that most of the time, those who opt to rent instead of own don’t stick $40,000 into the market. They’re renting because that’s what they can afford. Sure, they might be saving a portion of their income for retirement, but so are homeowners. Are renters saving a greater proportion of their income than homeowners? That is, if someone with a mortgage is saving 15% of their income for retirement, do you really think renters are consistently saving 25%, since they’re saving so much money by renting instead of owning? I do not believe so. I think they’re likely saving the same 15%, if they’re saving anything at all.

@Lars (#200):

“Let’s say Mr. A and Mr. B both had $70,000 in cash in 1980 to keep it simple. Mr. A buys that house and it’s worth $700,000 today. Mr. B put that money into an S&P 500 index fund (not sure if they existed at that time, but let’s say he was able to replicate that in principle). Today, that money would have grown to over $1.7 million.”

Same problem, Lars. Mr. B did better because he took more risk. More risk must equal better returns. With the benefit of hindsight, we can see that Mr. B’s higher risk paid off. However, if he’d invested that $70,000 in September of 1987, he’d have come out way behind. But even if he hadn’t, you’re comparing apples and oranges. Over a long enough period, a higher-risk investment will generate better returns than a low risk one. It must – otherwise no one would ever invest in the high-risk investments. But that doesn’t mean they’re universally better and you shouldn’t waste your money investing in money market funds, bonds, TIPS, and CDs. It just means they serve different markets. Thus, direct comparisons like the ones you and Honey just made are dishonest.

Also, Mr. A’s gain is tax-free, while Mr. B would be facing an enormous tax bill.

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Ramki

I am wondering if this analysis would hold good for countries other than the US (since you talk about the CNN’s reference on American cities). Would there be a range of P/R numbers that make sense depending on the current condition of the economy? I am from India and I have bought 3 houses in the last 15 years. When I look back at the numbers, the P/R ratio has dramatically increased in the last 15 years. And in the last 15 years the buying market has been on the rise. Any explanation for this?

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Cyndi

Right now, I’m wishing I was renting because of job insecurity. 🙂 Houses aren’t selling in my area unless it’s a bargain basement foreclosure price. The idea of equity in your home is pretty much a myth right now.

In the 11 years I’ve owned my 60 year-old house, I’ve put over $35,000 into upgrades, repairs and maintenance. And if I could afford it, I’d remodel the bathroom (stuck in the fifties) and the kitchen (bad 70’s decor – formica covers half the walls!).

So renting and the flexibility it provides sounds real good to me!

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Shara

@Lars

Obviously in the scenario outlined the best thing to do is rent and then pay cash for the house. And unless I’m confused (which is possible since it’s getting late) in this perfectly linear mathmatical world I believe the best point to buy our house is at the inflection point when the mortgage is lower than the rent. In year 17 that point is passed so if the cumulative savings are dumped into equity in the house, the loan is 1.5 years shorter. You still have the $79k and the $362k house, but you also have about $45k in additional savings, resulting in a net of $486k in assets, including the paid off house.

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Mr. L

@Lars:
There is a problem with your example. Mr. A doesn’t need 70k to buy that house for 70k. That’s the beauty of real estate investing: LEVERAGE. By today’s standards, he only needs 14k. But *if* he did buy the house by paying the full price, you have to take into account he’s not paying diddly squat in terms of mortgage payments for 30 years and can invest much much more of his salary into that S&P 500 index fund that Mr. B invested in. So Mr. B’s got 70k invested initially in the S&P 500 and contends with growing rent. Mr. A has a 70k house and 30 years of earnings to invest into the S&P 500 (can you say “dollar cost averaging”?).

@ Honey:
Mr. A could sell, make an enormous profit, and buy a brand spanking new house in a cheaper neighborhood that’s bigger than his old one. Or he can stay and enjoy not making rent/mortgage payments for the rest of his life. Or he can rent out the house, getting rental income that will grow over time, and move to another house. Or he can sell the house. He has $700k cash. That is MORE than enough for a 20% down payment for an even better, newer house in Santa Monica (or Beverly Hills) if he really wanted to. The latter choice is unlikely because of his age, but we are not taking into account any other investments he has made over the years.

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Shara

@Lars

I never claimed one or the other is better either. I simply said it is a specious argument because there are too many variables to trace them over 30 years. I ran the numbers because people were throwing out things like “$1000 per month for 30 years” which is ridiculous, so since you asked…

Under my original numbers at the end of 30 years you have ~$420k assuming it was invested at 8% compounded monthly in perpetuity (which we all know is poor planning as retirement looms). Not $420k MORE than buying, but if you only invested the money you saved over buying the house and stopped working after 30 years your money money would pay your rent you could do it, for six years. At that point your rent exceeds the monthly income you are getting from your investment and you start drawing down principal. The spreadsheet says it would last you 25 years.

That assumes you continue to make an unrealistic 8% interest. If upon retirement you transfer it to a bond with a relatively high 5% interest it lasts just over 16 years. Then you’re broke and pretty old and have no assets.

With the house you bought, after 30 years you have a $362k house and $79,000 invested. If you keep that $79k invested at 5% and pay insurance, property tax, and upkeep from it, it will last you for 26 years and you will have a house worth $606k, at which time you could theoretically get a reverse mortgage or personal loan against the house to pay the expenses until you die.

IF you did the math you know that you have a $14k profit on paper from renting over the 30 years. If you adjust the numbers within an easily defendable range that can jump DRASTICALLY (easily to a five year break even point depending on appreciation and return). But regarding what you stated was the premis of your arguement:

“…but the point is that at the end of the loan after 30 years, the renter will sit on a pile of cash, the interest of which will pay for the rent…”

That is wrong unless your numbers are more optimistic.

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Honey

Say Mr. L does sell his house and make an enormous profit. Now where will he live?

Not in Santa Monica.

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Lars

@Mr. L:
That’s a nice example. Let’s say Mr. A and Mr. B both had $70,000 in cash in 1980 to keep it simple. Mr. A buys that house and it’s worth $700,000 today. Mr. B put that money into an S&P 500 index fund (not sure if they existed at that time, but let’s say he was able to replicate that in principle). Today, that money would have grown to over $1.7 million. Of course Mr. B would have to use part of the capital gains to pay the rent, so he will come out with a bit less. Doing some quick and dirty math, it would probably be in range of $500,000. Still not quite as good as the house, but not as terrible as you make it look.

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Ms. Clear

I agree that saving the difference is important for renters. My hubby and I rent and save 20% of my take-home pay. Renting keeps our monthly expenses quite low. Heat and hot water are included here, so we just pay electric/gas, internet and phone. That’s it.

As I’m the primary and only earner right now, there’s not really enough income for us to buy. I did the PR formula and got a 22 for a very cheap house in this real estate market.

We’re just saving and biding our time. Eventually, we’d like to buy a duplex–half to live in and half to rent. But I’m ok with that taking another decade.

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J.D.

@Mr. L (#197)
If you intend to buy and never move, then absolutely buying makes the most sense, if you buy a home you can afford.

The point of this post isn’t that renting is better. The point is that renting isn’t as bad as folks make it out to be. Whether you should rent or buy depends on your preferences and on your situation. But there’s a lot of hype out there that says if you don’t buy a house, you’re making a poor decision. That’s just not the case.

As always, make the choice that’s best for your circumstances…

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Mr. L

OK, I am a little confused here.

I live in LA. Let’s say Mr. A buys a house in Santa Monica for $70,000 back in 1980 (I think that’s realistic, no?). And Mr. B is firmly intent on renting.

Based on current prices, that house in LA is now AT LEAST $700,000. Mr. B is now paying AT LEAST $2500/mo for rent for a Santa Monica house ($30,000/year). So Mr. A has paid off his mortgage and can sell his house and make a nice little profit. Mr. B is paying up the !@# in rent for the same exact living conditions and can’t sell any property (hence the “throwing away your money” phrase).

I know Mr. B could’ve invested the difference in the stock market, but Mr. A also could’ve invested as his wages increased due to inflation while his mortgage of $70k remained the same. Meanwhile, Mr. B’s rent is increasing every single year. Mr. A’s investments would be diversified (stocks + real estate) while Mr. B would only have stocks.

I know Mr. B could’ve moved wherever/whenever he wanted, but since Mr. A bought in a nice area, he could’ve rented out his place anytime and moved. And with rent inflation, the rent would eventually cover the mortgage. The rent income will eventually ECLIPSE his mortgage. Mr. A could’ve rented out a room while still living in that home. Mr. A could rent his place out now for $2500/month!

I have not even mentioned the tax benefits. I have not even mentioned if Mr. A overpays his mortgage and completes it earlier than 30 years. I have not even mentioned that Mr. B’s stock picking may not necessarily perform as well as the 7% average return of the S&P 500.

Sorry if I come across as condescending, but I kinda still believe the “myths” you stated in your article! 🙂

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Andy

Yes renting is a great idea… If it is not forever that is. You are only saving money if you invest the difference which is doubtful that many people actually do. Secondly the main benefit of home ownership is that at some point you PAY THE MORTGAGE OFF! How is everyone missing this point? No payments sounds cheaper to me. As we all know most people retire with less than they had before retirement and if you still are renting.. sucks to be you! Also for everyone whining about home repairs have you ever heard of an emergency fund? Yes sometimes life happens and things break. boo hoo.

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Lars

@Shara:
“If you want me to break down what the renter would do with the additional money over the decade where it is cheaper to be a renter I can do that as well, but then to be fair I would have to do the same for the home owner for the years after since the argument has been pretty much over the life of the loan.”
Yes, without taking that into consideration the comparison is completely unfair. I may sound like a broken record here, but the point is that at the end of the loan after 30 years, the renter will sit on a pile of cash, the interest of which will pay for the rent, and the homeowner will have a house that doesn’t generate cash, but it allows him/her to live in it. One may be better than the other, depending on the circumstances. I’m not saying that renting is always better, but when people say that buying is always better, then that’s just not true.

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Shara

@Lars

In my original post I said 7% interest rate on a $200k house 100% financed.

And yes, at 7% a $200k loan is P&I of $1330.60 with 0.1% escrow of $200, so the mortgage payment would be $1530.60 compared to the $1000 rent payment. A 6% loan would be P&I of $1199.10. I made no prepayment assumptions, but that would move the break even date up due to an inability to prepay on your future rent and save anything compared to an ability to save on interest.

If you want me to break down what the renter would do with the additional money over the decade where it is cheaper to be a renter I can do that as well, but then to be fair I would have to do the same for the home owner for the years after since the argument has been pretty much over the life of the loan. I think there is a consensus that for a shorter time-span the break even point is overshadowed by other considerations.

My point is mostly that, as JD eloquently posted about a while ago, AVERAGE IS NOT NORMAL. Have one major change within the first five years and the whole trajectory of the calculation changes. 2% appreciation includes years like the past couple with depreciation as well as the years prior to that with explosive appreciation. the same is true for rent. Have a huge jump or dip and everything radically changes. And all of that is independent of personal changes that precipitate (or prohibit) a move.

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Jeremy

@Jane,

What he is saying is that renters get the standard deduction of 11,400 a year. Most people don’t come near that in itemized deductions, so a lot of the interest deduction is eaten up by that.

Say you give $2000 to charities, and deduct some state taxes, maybe another $2000. That is only $4K in itemized deductions. A renter would claim the 11,400 standard deduction instead of itemizing since 11,400 is greater than 4,000.

If you have the same 4,000 to deduct, plus an interest deduction of 9,600 that total is 13,600, only 2,200 more than the standard deduction anyone can claim. Of course you would also add property tax and tack on another $1-2k depending on where you live.

In that respect, the interest deduction isn’t that much of an advantage. Even in our case where we almost always hit the itemized limit before mortgage interest, the advantage gets lower and lower over time as more of our payment is applied to principal.

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FinanceDad

There’s other advantages to home ownership too, like being able to deduct the interest…

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Crystal

We don’t spend extra time on our house either. We have the same biweekly maid service for our bottom floor as we had for our apartment ($45 every two weeks). We pay an extra $120 a year to have the top floor cleaned as well.

We’ve only had to spend an extra 5 hours and $160 total on purely house maintenance.

We have chosen to spend time and money painting and gardening, but that wasn’t necessary.

The only necessary expenses we’ve had on the house that we wouldn’t have spent in an apartment have been purchasing the appliances since our house didn’t come with any…that was $2200 three years ago.

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Jane

“the standard deduction for [a married couple] is $11,400. You’ll have to be in a $200k house for the interest to exceed that in the first year.”

Can you break down your math? We have a $125,000 loan at 6.25% and a 2nd loan of $15,000 at 7.25%, and we have deducted our house interest for two years. Both years our interest and other deductions exceeded the standard deduction. We do contribute to charity and have minor interest from a student loan, but not that much. I think even without those we would have surpassed the standard deduction.

Either way, I tend to agree with you that the tax deduction is overblown. It is only in play for a short time – that is, unless you live somewhere really expensive and have a huge mortgage.

I have one thing to say to renters – you seem to have this sense that homeowners spend hours a week maintaining their houses. This is simply not true. Unless you bought a money pit, most people have repairs only sporadically. I spend my week-ends doing chores around the house, but those are the same ones I would be doing in an apartment – cleaning, laundry, dishes, etc. It’s really not that much work to have a house, especially if you like yardwork.

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Honey

@Crystal, then you have done a great job doing what works best for you! The only job options my sweetie and I have given our specialties and the layout of Phoenix, we couldn’t work anyplace but the middle 🙂

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Crystal

@Honey
To compare apples to apples, I guess my mortgage would only be $400 a month and my significant other pays the other $600. It’s a 3 bedroom house with a covered patio, private backyard, and an attached 2 car garage.

We live in a subdivision in Spring, TX…that is a definition of suburbia. It’s one of the many suburbs surrounding Houston, TX. Our commutes are short since we bought our house after getting our jobs…location, location, location.

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Lars

@Shara:
That sounds like a reasonable model, but you are missing something. In the beginning I assume mortgage payments are higher than rent payments (over $1,300 mortage payments vs $1,000 rent according to a mortgage payment calculator). You’ll have to sum up this difference and add appreciation to it. This is the equity a renter can build because of lower monthly expenditures. If you already did that, which interest rate did you use?

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Honey

@ Crystal, I share a 2 bedroom condo with my significant other in Phoenix, AZ – private backyard and covered parking. My share of the rent plus renter’s insurance is less than $350 (total cost $975, we pay rent proportionally to our income). Also, we could easily live in a smaller, cheaper place if we had to as well.

I would also argue that if you are not an hour from downtown then you are not living in a traditional suburb, just an area of town that is slightly away from the middle 🙂

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Crystal

@Honey
FYI, not all of us suburbanites want to have children either. Yes, there are children in my neighborhood. No, we don’t plan on having any.

I read, board game, hang with friends, kick box, volunteer at the Houston SPCA, am a foster parent for Pughearts, Wii, Netflix, hike, feed the ducks, watch tv, cook, babysit and petsit for extra money once in a while, and visit my family on the weekends. I also love laser tag and paint ball. My husband and I have a 10 minute commute and a 30 minute commute respectively.

We only go downtown if we want to go to the Alley Theater, Toyota Center, or Minute Maid Park…it takes about 30 minutes to get there and 10 minutes to park. I really don’t think my life is much different than those that live downtown and my groceries and gas is cheaper (don’t know why).

I have nothing against those who want to rent, but stop making false assumptions about suburbs and homeowners.

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Crystal

@Honey
Our house was $114,000. 20% down was $22,800. $22,800 invested at 6% for 30 years comes to about $131,000.

In 30 years, how much do you think rent will be?

And please don’t argue that you would add to it…I also add to my investments along with my house. I pay less than $1000 a month for the mortgage, taxes, and homeowner’s insurance.

In the last 3 years, I replaced my own hot water heater coils and thermometers for $28.31 and 2 hours of a Monday evening. I had our A/C compressor replaced for $90 while we were at home anyway. We fixed our toilet with our hands and about 30 minutes of one evening. Our appliances cost $2200 and have been going strong for 3 years.

Our last apartment was $730 a month and has since increased to $850 a month.

Our house was bought in 2007 and will be paid off no later than 2018. That means after 2018 that we will be living in our house for the cost of property tax, homeowner’s insurance, and maintenance costs…even at 3% inflation, that comes to less than $5000 a year…where would you want to live that costs less than $420 a month?

Cost of home ownership in Houston, TX is definitely low enough that renting is a financial loss.

Our $22,800 was better invested in our house.

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Jeremy

@178 Dan

Our deductible amount before interest is usually close to the standard, so we typically take full advantage of the interest deduction. At our last house that worked out to be a tax savings of around $2400. That is before deducting property taxes.

I’m also not guessing at the incidentals and maintenance since we have owned before. I have a pretty good idea what that runs us.

Even if we wind up spending $200 more a month than we would renting, the payoff comes with all those years of rent free living once the house is paid off.

Short-term renting makes financial sense, but not when you are looking long-term.

Now, I don’t make millions. Our tax deductions either save us 15 or 25 percent, depending on which we apply first. We don’t have a ton of money for housing, which is why we won’t get ahead by renting and investing the rest. $2400 invested a year might net us $200k by the time a house would be paid off, but we would still have to pay rent.

I do understand the rental argument, but not financially. For us, renting right now is a good option because we are in a fluid situation and will be moving on most likely within the next 6-12 months.

Then we will be looking at staying in the same place for a long time, so buying becomes our best option.

Honestly, I don’t think there is a definite answer. Where you live and how much you have to spend will be key factors. A lot of people can’t spend much, so the savings difference isn’t enough that investing the difference makes it worthwhile when mortgages are finite and rent is infinite.

That’s why I don’t pay that much attention to the formulas people put out there. Most of my friends can’t spend $2200 a month on a house. So if they rent for $1200, they aren’t freeing up any money. $1200 is what they would have to spend on a mortgage as well.

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Shara

Okay, y’all and some of the numbers being thrown around were starting to drive me crazy so I ran some numbers with the following assumptions:

*Same house – price $200k, rent $1000

*100% financed at 7% interest for 30 years

*Rent increases at 3%/yr; house appreciates at 2%/yr

*Escrow is 0.1% of the value of the house per month (number based on my local conditions)

*upkeep is 0.1% of the value of the house per month (rule of thumb)

*Cost to sell is 10% the value of the home

At that point the break even point [Total Rent – (P&I + escrow + upkeep) + sale price*0.9 = 0] is 17 years. Less than that renting is cheaper, more than that and owning is cheaper.

All other parameters unchanged:

*Rent increased by 4%/yr break even is 16 years.

*Appreciation increased to 3%/yr break even is 13 years.

*Loan rate reduced to 6% break even is 12 years.

*All three break even is 9 years.

I could go on like this all day. If you want me to run YOUR assumptions to tell everyone why you’re right let me know, I’d be happy to now that I built it.

These numbers might seem high or low to you, but as JD’s original column pointed out, so much depends on the rent and purchase price points you start with. Right now in my area rent is ~$1100 for a $250k house, but five years ago it was ~$1200 and $185k for the same house.

Oh and if anyone is interested, in 30 years the escrow & upkeep are $355.17/mo and the rent is $1870/mo. But good luck finding any situation that is that stable for 30 years, so those numbers are only worth the hypothetical money they’re made of.

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Amy H.

That NYT calculator is very helpful. In every scenario I put in (I rent in San Francisco, which has to be up there with Sydney — and, I’m sure, Manhattan — in terms of the most expensive city in the world to buy), buying would NEVER be more advantageous to renting on the 30-year scale. Presumably this is mostly because it still costs $850K+ to buy a 2BR 1BA (no parking) flat in SF.

Rent control is a huge factor in all this. If the landlord can’t kick you out on 30-60 days’ notice for no reason, and can’t increase your rent beyond a percentage set by the municipal rent board (usually less than 1%), then you are in a far better position financially — as a renter — than you would be without rent control.

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NicoleZ

It seems that I posted about the same time as another Nicole. I did post #56 and changed my Name to have a Z after it so you can tell the difference.

@Lars What you are saying makes sense for you. My husband works in an industry where we can move to, at most, 5 different metro areas. Our family is here, and the standard of living is cheapest here (compared to other areas). We are in the part of town we love, in a neighborhood with great interstate access, and a town that is going through growth like crazy bringing in more stuff to do. Theres just the two of us now, and we don’t plan on having kids, but we have a four bedroom house and like having the room. If we downsize, then we cut costs. Also, in my area, it costs at least $3000 + a months rent to break a lease on an appartment. We actually had our house and the appartment for 4 months because it was cheaper to pay rent for 4 months and not live there than to break the lease.

As for your retirement plans, thats great for you. I tend to be a homebody and moving around that much stresses me out just thinking about it.

I’m going to assume the education comment was not meant for me.

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Honey

@Crystal #174 – you are right and I apologize for name-calling suburbanites, but since I do not find the idea of raising children rewarding or interesting there is very little in the suburbs for me. Not to mention, as far as driving – I pretty much refuse to drive anyplace that takes longer than 10 minutes to get to. And because I currently live 3 miles from my work and a wide variety of shopping, museums, restaurants, etc., that is something I can do. We used to live in a suburb and it took me an hour each way to commute to work, plus I had to clean this huge 3 bedroom house, inside and out. Now we are in a tiny condo in the middle of everything – not only do we go out more, but I have been able to participate in a variety of hobbies that were totally impossible when I spent all my time in a car. I would pay significantly more to live in a place where I didn’t have to drive as much, but in my case my monthly expenses decreased significantly after we moved, PLUS I don’t have to drive as much. It’s a bargain however you slice it!

But the bottom line is, like I said, do what works for you.

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Dan

@175 (Jeremy):
“The difference in rent and a mortgage will be negligent for us. Sure there will be incidentals and maintenance, but tax deduction should about make that a wash.”

Unless you’ve run the numbers and know for sure, I doubt it. I assume you’re married — the standard deduction for you is $11,400. You’ll have to be in a $200k house for the interest to exceed that in the first year. Assuming you are in that $200k house, and your property and state income tax are about $5k together, my guess is that your net tax benefit from owning will generate you no more than $750 (15% * $5k.) I’m also going to guess that your incidentals and maintenance will be much greater than that.

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Honey

@Kevin, #170 – I’d rather pay taxes on an investment portfolio of index funds yielding between 6-8% over 30 years than come out even after inflation, which is the house scenario.

Put another way: if you put 20% down towards a house (let’s say $40K, since the average house is around $200K at the moment) and I put the same exact amount in an index fund/IRA and sit on it for 30 years, who has more money at the end?

I am pretty sure that the difference between what you’d save not making a mortgage payment in your later years and the giant pot of money that I’d have to pay rent in my later years would be negligible, and that I’d probably come out at least slightly ahead – possibly significantly ahead, since I’d be making additional contributions in the intervening years and my investment would be compounding and you would have replaced your roof at least once, your water heater, etc.

If someone more formula-savvy than me wants to break down the math I’d be very interested to see it, since this is just my general sense of it (I was an English major 🙂

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Dan

@172 (The Broken Penny):

According to wikipedia, an investment is something you do with money or capital to gain profitable returns. I can’t say for certain that something that does not gain or lose value (which is a house in the long run… it just maintains its value) is an investment. In which case, I wouldn’t call a house an investment, and certainly would never refer to a car as such.

As for the non-financial points that you raise, well, you’re right. But then what you are doing is purchasing the ability to make changes and adjustments to your living environment, and in addition, some freedom.

I’ve mentioned it before, but I live in an expensive area. I rent a 725 sq ft apartment for $1050/mo, and a reasonable townhouse in this area is $350k — a mortgage payment of $2098. (That’s before maintenance, HOA fees, increased utility bills, property taxes, and what not.) I estimate my monthly ownership costs in that scenario to be $2500 before making any tax adjustments. Right now, I simply don’t have an extra $1500 that I can commit to housing, so I’m “stuck” renting.

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Jeremy

I’ve never understood the whole renting is better than buying debate. Sure, I can possibly rent for less than owning, but in the South where I am, houses don’t cost that much. We rent now, but we are thinking about buying again this year.

The difference in rent and a mortgage will be negligent for us. Sure there will be incidentals and maintenance, but tax deduction should about make that a wash.

At some point in time, our mortgage will be paid off but a renter will always be paying rent. A good friend of mine (I helped pay his mortgage when we were roommates) will have his house paid off in 7 years. He’ll be 44 (or 45) when it happens. Tell what is more freeing, being able to move on a whim, or never having to worry about plunking down a large chunk of money each month in rent?

Someone commented on why buy a large house when if when you retire you won’t need it. Well, if you own (mortgage free) your big house when you retire, sell it and by something smaller, since smaller homes should cost less than your big home you’ll even have some cash left over.

For a lot of people, the choice between renting and owning is fairly cut and dried. They have X amount of dollars each month to commit to housing. They will either rent or buy something close to that amount. Renting will only save them a small amount of money each month to invest.

So the renters will be retirement age and still paying rent on a reduced income, without a large investment to show for it because of the small difference between renting and buying.

Whether or not my house really makes me any money isn’t the point (at least for me). At the end of the mortgage, I will have something tangible to show for my monthly housing outlay. And I won’t have to worry about paying rent ever again. To me, that is a much smarter option.

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Crystal

@Honey (#169)
You fussed at Kevin for calling renters lazy or inept for not wanting to take care of a property…then you turned around to mention “horrible suburbs” and their “lack of people that are interesting”. Ouch to both of you.

I live in a suburb. My friends and I seem interesting to each other. I don’t like house maintenance but I dislike renting more. We suburbanites actually do the same things you city dwellers do…we have these things called cars and we use them to drive to the things we want to see downtown…

I mean seriously, how did this get personal? Landlords break even or make a small profit until the mortgages are paid off. The point is that they BREAK EVEN. Whether you own or rent, your costs will go up pretty equally because the landlords will pass on the expenses…they have to or they would have no reason to rent out their property. Tax deductions for landlords are great, but they still want to make a profit…my parents have been doing this for 20 years…renters of their 2 bedroom house helped to pay for their 5 bedroom house.

Whether or not to buy or rent depends on a variety of numbers that are location specific. In places where you can find good houses that are less than 2.5 times your annual salary that you would stay in for more than 5 years, you would probably be better off buying FINANCIALLY. I would also suggest only buying a house if you could afford a 15 year mortgage for it…even if you take a 30 year mortgage to be safe, by paying the way you would on a 15 year loan, you will save tens of thousands of dollars.

You’d be surprised how little of a difference there is between a 30 year mortgage payment and a 15 year mortgage payment…for us it was less than $150. It helps that 15 year loan rates are lower.

EMOTIONALLY, do whatever you want!

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Dan

@Kevin (166):

[b]It’s a hedge against inflation.[/b]
No, not really. Your interest rate contains an inflation factor in it. And as noted above, there’s a lot of things associated with home-ownership that are not inflation protected.

[b]It’s a tax deduction.[/b]
You do realize that a couple married filing jointly has a standard deduction of $11,400, right? Further, you realize if you finance $200,000 over 30 years @ 6%, that the interest payments in the first year total $11,933? That means the total benefit in Year 1 is only a $533 deduction, yielding a $106 savings on my state and federal taxes (15% fed bracket, 5% state.) And as someone pointed out, the standard deduction increases every year while your interest paid gets lower. Sure, itemizing allows you to deduct property and state income taxes. But in my case, on a $200,000 house, I’d only be able to deduct $2k or so in property taxes and $3k in state taxes. My net savings on federal income taxes is $750. The net “true” benefit will get lower and lower each year as the standard deduction creeps up and my interest paid is lowered.

[b]It’s a forced savings plan.[/b]
I suppose that’s a benefit, but how much it is worth escapes me.

[b]It’s a tax-free gain.[/b]
Maybe, but a tax free gain that only keeps pace with inflation isn’t much of a gain.

[b]You can use it to secure better interest rates on other loans.[/b]
That may be true, but personally I’m looking to avoid taking on new debt. And if you’re going to “forced savings” is a benefit from home owning because most people can’t/won’t save on your own, then I’d have to argue that the ability to take on cheap debt is actually a bad thing — too many people use their house as an ATM. Debt is debt — no matter how cheap it is, you still have to pay it back.

You bring up a few valid points. But truth be told, the actual value of those benefits are way over valued. Spending $1 to save a quarter is NOT good personal finance, and buying a house for many of the above reasons is just that.

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The Broken Penny

@161 (Dan): The wealthy typically look at the return on a purchase, that is why most millionaires do not splurge on expensive cars even though they have the assets to do so. Cars are a terrible investment, while houses are a good investment in the long term.

I know for sure that I hated living by a landlords rules. Who wants to be told whether or not they can have a dog, paint the walls, unexpected increases in rent, fighting to get security deposits, ect. Home ownership has it’s flaws, but I would take it any day over having to live by a landlords rules.Again, a renter who is a skilled investor could potentially beat a homeowner in the long run, but unlikely.

JD, this was a great article. I will be looking further into this issue and putting together a detailed analysis with exact numbers and scenarios. I am really curious what kind of investing it would take to beat a home owners return. Of course there are tons of variables to content with, but I think creating a few scenarios will help.

“Houses aren’t a “tax-free gain” because they appreciate at the level of inflation. Just because a home sells for a higher dollar price years down the line does not mean you’ve made any money.”

That’s a little misleading – taxable investments are subject to inflation, too. So given 2 investments, both subject to inflation, but one taxable and the other tax-exempt, which is preferable? The tax-exempt one, obviously. That was my point.

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Honey

@Kevin, #166 – Much of what you say is true, but houses aren’t a “tax-free gain” because they appreciate at the level of inflation. Just because a home sells for a higher dollar price years down the line does not mean you’ve made any money. Most of the time you are lucky to break even once inflation is accounted for. And does the average American itemize? Hardly anyone I know does.

I also don’t think it’s fair to call people lazy or inept because they are unwilling to take care of the property themselves. You have to think of it in terms of opportunity costs – time I spend repairing my home is time I can’t spend doing any number of things that are more valuable to me (whether in dollar terms, if I am working, or in emotional/stress terms – I would rather not have to worry about paying for or scheduling home repairs so that I can spend my evenings reading a good book).

For me, the benefits of renting include:

– ability to move without worrying that I have to sell my current place first (I am 30 and have never lived in any home longer than 4 years, and for the most part 2 years or less),

– living in a place that is sized appropriately to my lifestyle (we are never having kids so a 2-bedroom is the biggest I’ll ever need, and you pretty much can’t get a house with fewer than 3 bedrooms, which is ridiculously huge),

– living smack dab in the middle of the city instead of the horrible suburbs with their lack of things to do, lack of people that are interesting, and long commutes to anything and anyone you might ever be interested in

Lots of people have mentioned the “forced savings plan,” but I really do not think there is much difference between someone who pays $1000 a month in rent and $500 on entertainment and someone who pays $1500 a month in a mortgage but can’t do anything fun at all, ever until they retire. It is totally, amazingly worth it to me – I’d rather pay rent for the rest of my life than have anything to do with owning a home. Owning a home would add so much stress to my life, not to mention limit so many other opportunities for me, that there’s just no comparison.

In other words – JD’s right! Do what works for you, but don’t assume that it will work for anyone else.

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Bear

Bananen@162 and others who have made the point the if a landlord can do it and make money I must be… trust me, there are many additional tax advantages that a smart landlord has a home owner does not. In addition to the typical homeowner’s interest expense every single expense for operating that business is deductible, your travel, your lunch meetings, your home office to run the business, all the costs of repair and improvement, etc., etc. A huge tax advantage is depreciation – this adds thousands to a wise investors bottom line annually that is deductible. None of those things are available to a home owner, it is an entirely different picture!!

On top of that, many landlords that have not scaled their investments are not “making” money – they are trying to build a small nest egg with the goal of steady income when the rental mortgage is paid off. Otherwise they are lucky to break even with the repairs, vacancies, damage, court costs, etc. even with all the deductions.

A house you buy to live in is NOT, NOT, NOT an investment. If you run the numbers like I’ve seen folks doing in previous posts demonstrating that you are “making” money and its a smart investment you are missing so many costs. As one poster wisely pointed out – where are all your closing costs on both ends of the deal, the commission when you sell, did you include any points you paid, etc.

So many of you keep mentioning how deductible the interest is – folks you deduct it but you don’t get it all back!!! It allows you to lower you taxable income. For example if you pay $10,000 in interest each year on your home and your in the 25% tax bracket that only lowers your tax liability by $2,500 dollars. All the rest of that $10,000 is an expense you pay EVERY year, just like rent plus taxes, plus repairs, plus, plus, plus.

And for the first 10-15 years the BULK of your mortgage is interest expense. When do most people move – in less than seven years. What equity do they have, very little out of all that mortgage they paid, only market appreciation. As JD pointed out that is WAAAAYYY below the typical return even a very conservative investor can make.

One poster suggested $200/month would cover all his repairs – Yeah, right, not if he truly includes all his operating costs. That could only possibly be true if you bought a brand new home and move within 5 years, even then you’re pushing it. If you move within 5 years you will have many, many other costs like commission to sell which alone usually wipes out any gains in 5 years.

Only someone who truly tracks ALL costs can see that you always lose money on home ownership unless you get very, very lucky and have a freak dramatic appreciation such as happened between 2002 – 2005. If you bought at the very beginning of that and sold at the peak you probably (probably) made money. Otherwise I’d love to see the documentation that can prove anyone living in a home for any length of time can make more money than a wise investor with the same starting capital. The math just doesn’t work.

If you want a home for the other societal reasons that have been mentioned above – go for it! But don’t kid yourself that you’re saving over a smart renter that wisely saves and invests. The math just does NOT work.

Again, this comes from someone who has owned several homes, kept meticulous records as well as someone who has owned many, many rental properties. BUT today, is a renter of a very nice home with absolutely no regrets and loves saving the money and growing my wealth “slowly”! I only wish I knew this at 20 – I’d have MUCH more money at this point! : )

As far as Kevin@166:Hedge against inflation – NO, NO, NO! Your mortgage may not change (assuming you were smarter than the vast majority of buyers in the last decade who got adjustable rate mortgages) but EVERYTHING else goes up, taxes, cost of repairs, maintenance, insurance EVERYTHING! Just like renting, all those costs are yours to absorb. You don’t see it when renting but the landlord does and passes it on.

Tax Reduction remember you have to SPEND more first to get the tax reduction. This is not a magic slight of hand where Uncle Sam just hands you money, see my example above.

Forced Savings I only wish this were true but the numbers say otherwise. The vast majority of home owners today have multiple lines of credit or second mortgages and have chewed up any equity as they’ve gone along (you even advocate that foolish approach in your note). Now this may not be true in the GRS community but that is true in the broader market, especially for the over consumptive boomers and X’s it is. The typical 55 yr old today has $65k in equity – that includes their home!!! That is absolutely pathetic. If you’re 55 today with only $65k in equity you have truly lived a typical consumptive lifestyle with too many second notes, and HELOC’s on your home and little to no savings.

Tax free gain note there are limits to this if you exceed certain gain levels. While many people may not exceed that for the typical home it should be noted.

better interest ok, maybe, but if you have the exceptional credit score you should have this should not be an issue

Intangible benefits – I agree, although why a renter that can afford to buy would continue to live in the conditions you describe is beyond me. MOVE – that’s the advantage of renting. Besides as I mentioned before just because you buy doesn’t mean that you can’t end up with crappy neighbors or nasty teens with boom banging cars cruising your neighborhood. Really folks, its about attitude – choose to make where you live a home! It is a CHOICE!!

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Lars

@Kevin (#165)
“Yes, you are missing something. At the end of the 20 years, you’ve spent $340,000 on the house, but you have a $200,000 house to show for it. So you’re “down” $140,000. If you rented, you’ve spent $240,000, and have nothing to show for it, so you’re down $240,000. You’re $100,000 worse off by renting.”

Wrong. When you rent, after 20 years you have $100,000 in cash, plus capital appreciation ($340,000 minus $240,000). Depending on how this money was invested, it could it be more or less than the $200,000 equity in the house.

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Kevin

This is an interesting discussion, but I think JD reached the wrong conclusion. I feel pretty confident in saying that long-term, owning is almost always superior to renting. The exceptions would be if you move frequently, or if you live in a market where home prices are out of control, but rental rates are still reasonable.

The reasons ownership is superior are numerous and well documented.

It’s a hedge against inflation. As rents rise, your mortgage payment stays the same. For 30 years. Then they stop completely, forever.

It’s a tax deduction. If you itemize, you can lower your taxes, decreasing your cost of borrowing.

It’s a forced savings plan. This was one of JD’s “myths,” but as others have pointed out, many individuals reach retirement age and find themselves with no savings at all. But they have a paid-for home, which means their annual cost of living is dramatically lower than their equally-destitute cohorts who rented their whole lives.

It’s a tax-free gain. When you sell your house, the appreciation in price is a completely tax-free gain.

You can use it to secure better interest rates on other loans. If you have a line of credit secured against your home, you have access to much cheaper credit than renters do. You can take advantage of unique investment opportunities, handle emergencies better, and just generally spend less in interest for your non-home related borrowing.

And those are just the financial benefits – I don’t even need to bother listing all the emotional and intangible benefits. The ONLY way I can think of in which renting is superior to owning is that someone else takes care of maintaining the property. So I guess if you’re lazy or inept and unwilling to take ownership of your own problems, that would be a big selling feature of renting. But for everything else (the noisy, smelly neighbors, obstinate landlords, slow elevators $2 laundry machines, lack of covered parking, hassle of having guests over, the tight living quarters, lack of outdoor space to grow flowers/vegetables, etc.), owning a home seems far superior to me.

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Kevin

@TeresaA (#73):

Yes, you are missing something. At the end of the 20 years, you’ve spent $340,000 on the house, but you have a $200,000 house to show for it. So you’re “down” $140,000. If you rented, you’ve spent $240,000, and have nothing to show for it, so you’re down $240,000. You’re $100,000 worse off by renting.

To make the difference even more apparent, try running the numbers for the next 20 years, after the home has been paid off. Even assuming 0% inflation, you’ll spend another $240,000 on rent, while the home would only cost you $6,000/year (all the expenses you listed, minus the mortgage), or $120,000 total.

“I still don’t see much of a “savings”, if any.”

We just showed you, the savings is $100,000 in the first 20 years, then $6,000 per year every year after that (actually more, because of inflation).

“How much do you have to save and invest per month for twenty years to be a millionaire?”

Assuming 5% rate of return, $2,432.90. Is the difference between your rent and your mortgage that big?

“what if I were to save and invest the difference”

Well that’s the magic question, isn’t it. The problem is, most people don’t do it. They spend the difference. It’s like saying, “Why should I buy a car? What’s wrong with just leasing a car, and investing the money I’m saving by not having a full car payment? Won’t I come out ahead? If I lease for $300/month, and you’re paying $500/month to finance your car, I’m saving $2,400/year more than you. Thus, leasing is clearly the financially superior plan.”

You can see how silly that sounds – and unlike homes, cars depreciate!

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Adam

Just to pick up on something in the last part of the article I find interesting:

“Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.

These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)”

Now looking at this, there are a few things I note.

1) 1984 may not be quite far enough back, but while you compare housing prices to family income, you have to ask how the ratio of single-income to dual-income homes has changed over the past 25-50 years. I’m not sure how it links to the rent/buy debate, but I thought it was interesting nonetheless.

2) How have the costs of other things gone up? I know of many families who spend hundreds to thousands a year on children’s sports and extracurricular activities. How has that trended over this time frame?

Now, I’m not necessarily disagreeing with your ratio, as it seems similar to the ratios used in mortgage approvals here in Canada, but just thought I’d raise a few points.

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ebyt

I’m still in my early 20s, and single, so home ownership is not something I am considering at the moment. Some of my friends have taken the plunge into home ownership, and they are pretty much house poor. I think it’s a lot more expensive than a lot of people anticipate, and this is why in the US there is such an economic crisis. The economy isn’t great in Canada, where I live, either… but I think it’s a bit better. Banks were telling people they’d approve them for X amount, and people assumed that meant they could AFFORD that. Sadly, that was not the case.

I don’t want to rent for the rest of my life, but I can tell you if I bought a house now and my mortgage was the same as my rent, I’d get into a LOT of financial problems because I’d have to pay property taxes, repairs, all utilities, and so on. When people don’t think past the mortgage number, then THAT’S a problem.

People also think it’s ok to buy a house with 10% or less down – it’s not ok. And paying something off for 40 years is not ok, either. I’m not saying everyone should give up on the idea of owning a house, but I think people take home ownership waaay too lightly, and that’s why so many are in trouble. A lot of people who “own” homes should still be renting, in my opinion.

Renting isn’t so bad, anyway. I’m in a secure highrise, have a gym in my building, don’t have to shovel the snow, get a great view… and live close to all amenities. Maybe not perfect if I was 35 with kids, but it works for me.

I also live in a pretty pricey city (house price wise), and to afford anything I would have to move away from the city core, so that would mean I’d have to buy a car… and then my expenses would skyrocket right there…

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Bananen

Soooo … If renting is cheaper who is paying the landlord his profit?
Unless landlords have some special tax benefits it just doesn’t add up. In the short term perhaps, but never in the long run.

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Dan

@145 (The Broken Penny):

See, even then I wouldn’t assume that the wealthy believe that home-ownership is a worthwhile *investment*. It may be that they feel ownership is a worthwhile *expenditure.*

If I were to compare my first year of ownership vs. what I pay in rent at my current place, renting costs me $12,672, and owning costs me $31,216. (That’s a 725 sq ft apt vs. a run-of-the-mill townhouse in the area.) As someone else pointed out, people tend to buy larger properties than they would otherwise rent. The long run calculations show that it is clearly advantageous for me to continue renting my current place and invest the difference. But if my wife and I had children, we’d be buying that townhouse… not because it’s a better “investment” but because the larger space is worth it to us. (Actually, scratch that… if my rent was $1500/mo, which is probably low-end for a townhouse around here, it would cost me more to rent than buy.)

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Kevin

@KF (#63):

“I love that renting lets me afford to live in a neighborhood where I could not afford to buy.”

I love that leasing a BMW lets me afford to drive a car that I otherwise could not afford to buy.

Does that make it a smart financial decision? What’s the difference?

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Shane

I rented for a couple of years before buying a house. I know repair costs are included in rent, which can be nice, but what happens at the end of the lease? The landlord raises rent to compensate for the costs of repairs.

No matter which way you go, you are at the mercy of someone, whether it be the landlord or the bank. But the difference with owning though, there is a specific end date to that mercy.

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Doug

Wow. I just entered my info into that New York Times calculator and it showed me that over 30 years buying is never good versus renting!

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david

For those who like their maths simple but accurate- a P/R of 20 means that for every $100 per week rent, the home cost would be $105k. I find this a whole lot simpler to calculate in my head. The lower the cost of the home, the lower the P/R and the better ownership looks.

I know this is a financial blog, but I do think it is important that we don’t downgrade the non financial aspects. Based on my own experience both long term renter and current home owner, I am more inclined to invest in solar heating, fruit gardens and insulation and my child feels social ownership/ capital for ‘her’ area. As welfare worker and I have sat with clients, relatives and Indigenous groups who talk about a feeling I describe as ‘spiritual homelessness’, which only dissipated when they had a place they could call home (whether they lived there themselves or only ‘returned home’ on special occasions). This has had a profound effect on their wellbeing and expectations of life. This is worth a financial investment.

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Jonasaberg

I think that especially when it comes to renting vs. buying, the actual math really does take a backseat to other non-tangible issues.
The math may work in favour of buying but there is most certainly a price to be paid for having a mortgage for years and years, not just financially but also emotionally as it is bound to cause a certain amount of stress. On the other hand, how do you calculate the value of knowing that you can’t be asked to move because your landlord has decided to sell your apartment? What if a rental apartment is close to work and stores so you can go home for lunch every day whereas a house would be many miles away, adding the stress of commuting to work every day?

Moreso than the actual math, these are the issues I believe are the important ones in the whole debate.

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Early Retirement Extreme

Huh? Seems to me that the deciding factor would simply be to calculate the cap rate and compare it your portfolio returns. The P/R ratio you mention is related to the cap rate through its inverse, i.e. R/P.

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Cely

I’ve rented and owned. I own now, and while sometimes I feel tied down by the mortgage payment, owning a home has made me more responsible with my finances. I now have a big emergency fund, paid off my car, and have no CC debt. So that’s been a huge plus for me personally.

I would definitely consider renting again, it would depend on the situation. But what worries me most is that, with only 30-60 days’ notice, any landlord (at least in my state) can terminate your lease. If I was married with a child, renting a home, and had to pack up and move on short notice…well, it would be a nightmare. Especially if the child was in school. I don’t like that lack of stability or control.

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Brenda

@37 Shara – I’m 38 years old, and have moved an average of once every 2 years for the past 18 years (and have lived both on the East and West Coasts!). With these stats, I’d be crazy to buy a house. Unfortunately, the moves have never been on a whim, they’ve always been because bad luck forced it, or I had to follow where the work was.

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Brian

One more thing in favor of renting, at least from my experience, is that you tend to buy more house than you would otherwise rent. I went from renting a one-bedroom apartment to owning a three-bedroom house. It would probably just make me sad to calculate the P/R on that.

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impressions

it pays a lot when you own a property. Well, after i graduated from a University i started living on my own. I rented a house for a years now only to realized that I’m just wasting my money to nothing when I can actually apply for mortgage and be a homeowner.
i was just approved for a mortgage. What’s so good about it is that what I’m paying monthly is the same amount with i pay while I’m renting. And at the end, I own the house.

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April

We’re about to start building a home, but it makes a lot of sense for us because we have no plans to move from it. We’re near family, we love the acreage, and I’m head over heels in love with the plans. In fact, even if I won the lotto tomorrow, I’d build the same house–just pay for it in cash. 🙂

I like the feeling of owning and investing time in making my home beautiful, with gardens and landscaping, and I really hated that when I rented, people had access to my apartment at any time.

It’s not for everyone, though, and if you need the flexibility or just don’t want to deal with repairs and such–renting is the way to go. Do what’s right for you in your situation.

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imelda

I haven’t read all of the comments… but JD, I think you’re disregarding 3 important points:

1) If you buy a house, you’ll one day be free of house payments. All things being equal, that means freedom. My parents are nearing retirement age, but didn’t save much to retire on. Most of their SS will go to their rent, which they’ll have to pay until they die.

2) Your return on mortgage payments, as with any loan payments, is guaranteed. If you rent to “save money” and invest the difference, there’s no telling what will happen to that money.

3) Do you know the percentage of millionaires who own their homes instead of renting? It’s something over 90%, IIRC from The Millionaire Next Door. There’s probably a good financial reason for that.

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Anne

Thank you. A co-worker (who is younger) and her husband just bought a house. I’m really happy for them. I want a house for a zillion non-financial reasons. But when I weigh them against what a lousy financial decision home ownership would be for me right now… well, I’m gonna stay a renter. I just re-ran the numbers while pouting about how come I can’t buy one and they looked just as bad as the last time I ran them. Ahh well.

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Little House

Thank you so much for this article. Though my husband and I really want to purchase a house soon, this relieves some of that pressure off of us. I have been thinking that we were idiots for not owning a house sooner. Many of my family members, who live in less expensive areas, all own homes. I’ve sort of felt like the odd man out for not owning. I worked out my P/R based on a $275,000 house (what we could afford and really the cheapest homes in our area) and it is a little over 12. I think that means we should continue to rent, right? I will also check out that NY Times links too. Thanks again!

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Alexandria

We have done both, rented and owned. We loved the home we owned in FL. We had acerage, horses, could paint the walls any color we wanted, replace crappy old stuff with nice functional stuff, but at the end of the day, we ended up with a house that was worth about 2/3rds of what we paid for it 5 years ago. We are upside on this house, currently have it rented out for a major hit on our cash flow each month, but we are just trying to get by through this time in the economy. The place we rent right now is nice, clean, the landlords are great people, but we still have those limitations on pets, ability to change things in the house, can’t sublet for a roommate, etc etc. There are pro’s and con’s with each, but I think after we are done traveling and we retire, we will certainly plan on buying a house. We have a savings account set aside for this purchase in 10 to 15 years, so maybe it will be in cash and we won’t have to fool with the mortgage part of it. I enjoy renting for the freedom it offers us as a military family, but once retirement comes and we are in a more permanent place in life, I will be happy to take the plunge again, have property, build another barn, and start it all over again because that is what makes us happy.

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The Broken Penny

@112 (Dan): You make a good point. It could be that home owners were wealthy and because of that they bought a home. But if that is the case, then the wealthy must see home ownership as a good investment?

@130 (Lars): The fact that I am a personal finance blogger does not make me an expert, but I do know this. In my first year of home ownership at 5.5% interest rate I paid 80% toward interest. After tax deductions are applied that percentage comes down to 55%, which if far from 98% that you mention. That is also without making any additional payments toward principle, and in the first year of a mortgage, which as you mentioned is the worst for interest. That’s lot better than the 100% of a rent check that goes down the drain. Your argument about a home being subject to neighborhood changes, is the same risk you take when you invest in stocks. A house is an investment just like stocks, and both are subject to variability. You cannot make the argument that a house can become “toxic” without acknowledging that a stock investment can also become “toxic”.

I see the point that JD is making, but I disagree. I am not saying that home ownership is for everyone, but based on my analysis most people do better financial by owning, than renting. I also stated in my first post that I believe a renter could become rich if they are good savers and investors, but the truth is that most do neither. If you don’t believe me please review page 16 of the Federal Reserve’s February 2009 bulletin on Family holdings of financial assets, by selected characteristics of families and type of asset. There is not one category of investment in which renters outpace home owners.

I live in Sydney, Australia (the world’s second most expensive city to buy a home in according to a report that came out yesterday). Hubby and I are saving for a house at the moment. Despite the fact we are both professionals and earn quite decent income (about double the median household income for Sydney) we know there is no way we can afford to buy a home comparable to the one we live in now (which is on the small side, let alone if we have kids soon- which we want to). The stats you mention in the article have just confirmed that Sydney is far too expensive!

We rent and an identical house next door was sold 2 months ago so I have a pretty good idea of what ours is worth. Our price-to-rent ratio was 45.4% – way over the 20% mentioned in the article. Comparing the price to our median income I get 6.2, also way over the recommended 2.5.

Our house is by no means big, or flash- it is a terrace (i.e. thin and long with shared walls on either side), it has a backyard which is about 4x4m, it is 130 years old (which is very old by Aussie standards) and could do with a new kitchen, bathroom, paint job, etc. On the upside, it is relatively close to the city and it is handy to public transport.

Your article has just confirmed to me that for now, it is much better for us to be renting (so long as we are saving or investing the difference between our rent and a possible mortgage) than it would be to buy. When we do buy it will probably not be in Sydney as it is just not affordable for the average Australian family anymore.

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Adrian

I wanted to thank YOU J.D. for posting this article.

As a young individual (24) who is approaching his “debt-free” status, and is debating this exact scenario this year, I can truly relate.

I personally can see the benefits of both sides, and have grown up in households of both natures, so I completely agree that many many factors really do come into play during the decision-making process. (I also appreciate most readers on here for keeping an open-mind given the historical, and almost “patriotic” association with home ownership.)

The most profound and intriguing comment I read of dozens was:

#23 Alexandra << She stressed that while you can save money while renting opposed to buying, YOU MUST ACTUALLY SAVE THE DIFFERENCE TO COME OUT THE VICTOR. I believe this applies to both renters and mortgagers alike, as most of us desire the most satisfying AND affordable place to live so that we can SAVE MONEY, but how many of us actually SAVE much of the difference??? Hmmm…

I believe it would make an excellent article worthy of much discussion. 🙂

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Geek Mom

Thank you for posting this.

My husband and I have been renting our entire adult life and we’ve been told time and again we should buy. We enjoy the freedom from maintenance, snow removal and lawn care. We don’t have to stress about home repairs or the cost of our investment tanking.

We would like to rent a home to have a yard for our son to play in but we’re happy with where we are at. For the amenities we have vs. what we’d have to compromise on to purchase just don’t add up to us.

We also live in a state that allows us a partial deduction for our rent so while we’re not getting the federal tax breaks, we do get state ones.

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Brian

I do commercial real estate, so studying property as an investment is nearly second nature.

Looking at a true return on investment is the best way to go. I think the own vs. rent scenario is TOTALLY dependent on where you can/have to live (read: the market).

You need to look at things from an investment perspective. Residential brokers will seldom give you any of that perspective. If you were going to buy a house, what COULD you rent it for? Whats the IRR and CAP rate.

The longest I’ve lived anywhere other than with my parents was 2.5 years. But up until recently, I always “knew” I couldn’t commit to where I was.

Now that I’ve truly started my career and got married, I believe I’m more likely to stay put for awhile. But the question is how long? I have a great job, but who knows how long it will last. (That’s not stopping me from buying. The sheer cost is.)

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Caroline

Courtesy of my mortgage, I’m ‘throwing away’ a months worth of rent in interest every month.

It would be far cheaper to rent, but it’s not for us.

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Honey

I am 30 and the longest I have lived in one place since moving out of the dorms was 4 years. I have also lived in 3 different major cities during that time (Orlando, Tucson, Phoenix). My boyfriend and I anticipate a cross-country move sometime this year. We do not want to have kids and part of the reason is that they would inhibit our ability to move on a whim.

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Shara

Out of curiosity, how many of you move on a whim? That keeps coming up and I really don’t get it. Even if I rented, I HATE moving. I don’t have a lot of stuff, but furniture is heavy and dishes suck to pack, and something always seems to get broken…it’s one thing when you’re 20 and live with milk crates instead of tables and chairs, but at 30? And when you’re married and/or have kids moving can become a logistical nightmare, especially if you’re moving cities. It can be done but takes so much planning that you aren’t going to do it often.

It’s interesting how many home buyers over estimate how long they’ll stay in a house, and how many home renters underestimate.

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Dan

@132: Correct me if I’m wrong, but your property taxes are only deductible if you itemize, correct? Without the mortgage payment, are you even going to itemize? Second, in retirement, you’ll be at such a low tax bracket that the deduction won’t be worth much.

@133: $1000/mo in 40 years is about $357 in today’s dollars. I’m not sure that I want to rent something that cheap.

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Lars

@132: Or, when you retire, you could have $300,000 in the bank instead of owning a house of the same value, which generates a tax free $1,000 per month (when invested in a conservative muni bond fund) which in turn pays for the rent. That way, you wouldn’t have to worry about maintenance and such, and could move south easily on a whim if it gets too cold in the winter.

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Michael

I think you’re missing one point. When I retire, my house will be paid for. In retirement, I will not have any housing expenses accept property taxes and maintenance, property taxes being deductible. That’s one less expense I need to save for.

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Honey

If you are buying a house to leave to your kids (which someone mentioned as an estate planning move to set your children up financially) make sure they want it.

My boyfriend’s grandmother deeded her (paid off) house to her two children – problem is, it’s in the middle of NOWHERE, Illinois and also in need of EXTENSIVE remodeling/repair – both for aesthetic and safety purposes. There is no way they would be able to sell it because the town it’s in is so tiny, even if they could afford the renovations, which they can’t. They are going to be financially devastated by the burden of this once she dies, but they are too nice to tell her – they want her to believe the house means as much to them as it does to her.

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Tara

Buying was a better deal for me because I knew where I wanted to live long-term, and I paid cash. No wasted mortgage interest. As someone else pointed out, I only need to make a low wage to be able to pay my taxes, insurance and utilities, so it’s unlikely I’ll ever be forced out onto the street. And if things get really desperate, I can sell the property and rent a small cheap apartment.

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Sam

We had to buy a house because our landlord didn’t fix anything and after 3 years some of the ignored repairs were coming home to roost. Less then a week after I gave him notice of our intent to vacate (we hadn’t had functioning sewer for 3 months)he tried to sue me for damages to the house!
Thank the lord I keep papers! I had enough documentation to enable an atty (I had to hire) launch a counter suite and then suddenly the land lord dropped everything. Now that I own a house & have had to make many similar repairs it disgusts me that he wouldn’t fix things when they were so simple.

We couldn’t find a rental to save our souls at the time because the housing market was “hot”. I regret owning this house but I’m making the best I can of it. The repairs are killing me – literally. I’m having to rebuild this house room by room. At least it’ll be sound & nice when I am done.

I don’t think I ever want to buy real estate in town again. I hope to buy a few acres back in my families home county with the next few years & make a weekend get away out of an abandoned acreage. Nothing fancy – just something cheap with a well (water) that I can grow a humongous garden on and be undisturbed when I go there. If I have to put up a tent when I go there so be it – as long as it’s all paid for I can always fall back on it as a place to land when life gets rough.

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Lars

@104 (The Broken Penny) said: “Money spent on mortgage payments will most likely be returned with a profit. So even if rent is half the price of a mortgage, it is money that you will never see again.”
I’m a bit puzzled that a statement like this comes from a finance blog writer. In a typical 30 year mortgage, during the first year only a fraction of the mortgage payment goes toward principal. Something like 98% of the payment is interest alone. It’s the same as renting plus investing 2% of the rent. Instead of paying your landlord, you’re paying the bank. Yes, you will have paid off your mortgage over time, but if you rented and invested, over time you will have equity that generates enough interest to cover the rent. The outcome is the same, except that the renter is more liquid and flexible.
Of course there are scenarios and areas where buying makes more sense, see P/R ratios. JD is just trying to convey the point that buying is not always the better deal.
And yes, there are renters who save and don’t squander any money they have left over. Plus, they get to diversify their investment. Whereas buying a house, which is subject to neighborhood changes (think toxic waste dump in your backyard, or a night club next door), can be eaten by termites, develop severe mold problems etc., is like putting all your eggs in one basket.

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Dan

Des: I used the “trusty” 8%. But, my calculations suggest that as long as you get a 3.5% return on your savings, you’ve saved/earned back the $710,000 on your apartment. (Remember, with owning, I suggest that one has lost $250,000 at the end of 30 years with the numbers that I’ve used).

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Suzy

We’re buying a 400K house in a nice, but not rich neighborhood, and for us it’s a no-brainer. Together we bring in a little over 200K a year, and since housing is a huge huge priority for us (much higher than vacations or “toys” and other big expenses), we’ve been renting a very nice house for 2400/mo. Our new PITI payment will be almost the same, but some of it will stay with us as equity, the payment won’t go up $100/mo every year like our rent, and we can start a family without worrying that 3 years down the line the owner will want to sell or occupy the house. And 10 years from now, after accelerating our payments, we’ll only be paying taxes, insurance, and maintenance. Buying is definitely the right move for us, especially in this incredible buyer’s market!

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Ace of Wealth

JD,

As you stated above, money is more about mind than it is about math. I agree with you here, but I also think it’s so difficult to draw the line. To be able to look at yourself truthfully and say that despite the emotions the math can’t be ignored. How do you know if you’re fooling yourself? How do you know that you’re not merely making an appropriate financial sacrifice to secure your happiness.

Much to think about. Thanks for the great post.

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Jason Beck

#7 It definitely varies by situation, but I’ve been renting out to friends for 3 years now, and it’s worked out great for me. Maybe it helps that I’m easy going, and it doesn’t hurt that the house splits up easily… and my roommates are pretty laid back as well!

The numbers are pretty close… my total expenses after rent income compared to my total expenses when I was renting. But…

It’s not at all apples to apples. I had a 600 sq ft one bedroom, one bathroom apartment. Now I have a 1300 sq ft home with a basement (half finished, the other half suitable for storage, workbench, etc). Even if I don’t count the rooms that my renters use (including my second full bath) I still have much more living and storage space, an extra half bath, dedicated parking, a fenced yard for my dog, etc…

There are a TON of factors. That being said… as a renter, I often moved every year or two. Moving isn’t exactly fun, but I could get it done in half a day. Just 3 years into home ownership, and the dreaded STUFF really has taken hold and anchored me to where I am.

Here’s to spring cleaning… may we purge ourselves of unnecessary STUFF!

I’m not implying that anyone should move simply to get into an energy efficient home. I’m saying that one should seriously consider looking at Energy Star-rated homes IF one is looking to buy. Or at least consider efficiency upgrades to reduce your monthly energy costs.

(Disclaimer: to anyone ready to flame me for thinking I’m pushing a “global-warming-caused-by-man” agenda, I’m not! The reason I’m linking to this article is just to point out the value of checking out efficient homes, or even making efficiency part of the equation when remodeling. Irrespective of one’s views on global warming, one needs to consider the consequences of supporting dependence on oil just as one would consider the consequences of owing dept to a debtor. To state this another way, I’m pushing an “energy independence” agenda here just as many of us would want “financial independence”. Global warming has NOTHING to do with MY agenda in this comment!)

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LiveCheap.com

I always love the rent vs. buy arguments and some good ones are covered here but a few are missing. There is nothing wrong with renting but a whole industry that drives quite a bit of the economy makes sure that you feel like a scrub as a renter. I rented for a long time and was happy doing so and banked plenty of cash. I got rent down to the point where it was about 7% of income which makes it very easy to save. The problem for many people is that they don’t save money.

I’ve made numerous cases for why you should rent in my writings, but since JD took the renters stance, I’ll do the opposite.
Financial Reasons to Buy:
1) Every month you are paying down your mortgage and even in a zero price appreciation world, you are increasing your assets by reducing the debt on them. Kinda a forced savings plan for those not good at it. Don’t get overjoyed though, the principal payments in the early years are modest and it will take you 22 years to get rid of half your mortgage.
2) When you own a home, your retirement strategy becomes more secure: once you clear the mortgage, you’ll pay next to nothing in living expenses whereas if you rent you are going to pay rent for 20 to 40 years after you retire. This is one of the biggest factors that people don’t think about. With interest rates hovering at 2.5% to 3.0%, that $2,000 rent is going to require you to have nearly a million dollars in the bank.
3) In many places, especially with price declines and low interest rates, buying is far cheaper than renting. In Northeast and West Coast this is still not the case, not even close. But if you are in the Midwest, Mountains, and much of the South, housing is cheap.
4) Housing over time gives you financial options that you don’t have renting. If you need to borrow $25K because of an emergency, you can do it at 3% right now. Ideally you don’t have to do it, but its nice to know that you have that option.
5) Tax advantages: I’ll first state that the tax advantages of home ownership for the average family are overblown. But if you make good money, its ridiculous how good of a deal it is. Make big money and live in a high tax state and you’ll get your interest and taxes reduced by 45%. Then when you sell, you get a capital gain tax free up to $500K. Renters get squat, but your landlord does pretty well.

Comment on the Price to Rent ratios. I think this was pioneered by a Professor named Ed Leamer at UCLA. The problem I have always had is that they never compare apples to apples. 2 bedroom rental units and 2 bedroom townhouses are very different beasts. And when you get to houses, the gap is even wider. We looked at tons of rental houses in our area, none of which was less than $2,500 a month and all were crap. You needed to get to the $4,000 level before anything resembled what we would buy which meant that buying was about the same after tax benefits.

Of course there are tons of non-financial reasons for home ownership which I’ll skip. Bottom line, I would say that if you plan on staying in an area for 10 plus years, you want to have the security of fixed payments, the math on the monthlies is close, and you don’t mind doing lots of yardwork and other handy stuff, buying makes sense. If not, renting is the way to go and you shouldn’t be ashamed of it. Just make sure you save at least 15% of your income every month and invest it or you will have a serious issue at retirement.

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Frank

Interesting article,since I am single renting is the perfect option for me. I grew up in a nice 3 bedroom house with a nice yard, garage etc. It made for great childhood memories that I wouldn’t want to change. That being said I wouldn’t even think of owning a home unless I had a family and a job that payed enough to take care of all the little things that come with home ownership. Owning a home is big undertaking, things always have to be fixed, roof if it hails, toilet if it leaks, faucets leak etc. All that has to be maintained, and lets not forget the joys of property taxes! Bottom line if you buy a home it’s like a marriage, you’re committing to staying in that area for life if you’re just starting a family or at least 20 years or so till the kids grow up and leave. You better be sure or its money down the drain.

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Debbie M

@TeresaA, here’s how I see the math on your example:

Total cost to own a house for 20 years: 340K.
Value of house after 20 years: ~200K.
Total money wasted: 340K-200K = 140K

Total cost to rent for 20 years: 240K.
Value of apartment to you after 20 years: $0
Total money wasted: 240K – 0K = 240K

Extra spent for a house over 20 years: 340K-240K = 100K.

If you can invest 100K over 20 years so that it will grow to more than 240K, then renting gives you a higher net worth. If not, buying does.

@Avistew – I agree about condo fees being scary. You do have some say in them, but not much. Same with HOAs and HOA fees.

@Beth et al. – I paid 3x my income for this house, but I’m realizing I did things differently than normal people. When I bought my house, I went from paying $395/month in rent for a one-bedroom apartment to paying $610/month for a two-bedroom house, charging a roommate $305, and saving $100/month for inevitable repairs. I did go one or two months between roommates a few times, but could have afforded to do so indefinitely if I were very careful (though who wants to be very careful for 30 years?). I’m remembering that normal people do not want roommates once they get out of school unless it’s family.

Also, I plan to never have kids, so I don’t have to buy a house huge enough for them and then keep paying the huge bills after they leave or try to sell it the same time all the other boomers are trying to sell so I can switch to a small house. I got to start off with the small house (which they no longer build, so I got one built in the 1950s).

Even so, over half my net worth is still in my house. I keep adding to my investments, but they just aren’t keeping up with the growth of equity in my house. But if I sold my house, I’d have to earn 8% on the proceeds to be able to afford rent. I would like my net worth to be a bit more diversified.

@Budgie, I also see fewer bugs now that I have my own place. And when I do see one, I don’t have to use the horrible poisons my landlords used to use.

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wearsunscreen

J.D. I appreciate your material, and ussually lurk via the googlereader and usually agree with you. Assuming the right conditions for ownership are met I think gina, Kevin, Joe, Jason, KevinM and DebbieM all appreciate, like me, the aspect of an inflation hedge, and this would end up powerful if things get ugly… ugly like as in hyperinflation.

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James from Tech for the Masses

I am completely against renting if anyone can help it. I would rather build a nest egg and wealth by overtime, buying the house and owning it. From there I can rent it to someone else or hand it down to my children.

Sure there are arguments back and forth relating to this issue. However, I think all cent’s aside – home ownership is about feeling secure and having a roof over your head that nobody owns but you.

~ James

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RetirementInvestingToday

I’m monitoring and writing about both UK and Australian property prices based on price to income ratios as you mention. Both these countries saw a dip (now currently heading back towards the highs) during the global financial crisis however it was insignificant in relation to where the ratios have been in the past.

For that reason I’m still renting.

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Budgie

I bought a home in April of 2008, and don’t regret it at all. In fact, it was one of the best decisions my husband and I made.

I didn’t quite enjoy what sounded like elephants bowling with large boulders above me when I rented. Nor did I care for people blaring their music so loud that my cheap kitchen cabinets shook. May I also add I disliked smelling the cigarette smoke that floated through the vents? And I don’t miss the drunk college kids causing a commotion in the parking lot in the middle of the night.

Even if I rented a house – Which in my area would actually cost me more money than buying – I still wouldn’t have the freedom to do what I please with my living space. And I would still be at the mercy of a landlord who may or may not fix things needing repair in a timely manner.

Like others have mentioned, there is more to be considered with home ownership than just the financial reasons. But it even makes more sense financially for me to buy: I plan on being in my house 30+ years.

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Rebecca

I wonder where many of the commenters live? I live in one of the most expensive cities in the United States. I make an enviable income for someone my age. I cannot buy. It makes zero financial sense from a P/R ratio, even now. I could possibly buy a $450K house in a neighborhood with bad schools, but that’s about it (I’ve been looking, so I know). Or I could rent in an area with great schools for $2000/month and put the rest in my (future) kids’ college fund. And, even if I wanted to buy that $450K house, I can think of a lot of other ways to spend an upfront $100K downpayment/closing cost expenses.

I was obsessed with buying for several years, but JD’s link the the NYTimes rent v own calculator finally knocked me out of that desire on a pure numbers/value basis. Assuming incredibly favorable conditions, it would have taken 25 years to earn back my “investment” in the house. Math is an incredibly important factor that gets overlooked. My math says that my quality of life and the financial opportunities for my future family will be significantly improved if we rent. (And for those saying hyper-inflation will impact rent, I have a rent controlled unit, so it’s really not a concern.)

Oh, and if we lived in another city, say Houston where my fiance is from, I could buy a house with 30% down right now in a great neighborhood. I’d do it in a heartbeat. Context and math matter.

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mbelousov

There are pros and cons to both. While I’d love to own a house, the only way I will do it is if I pay all cash. A personal mortgage is a big liability, I will stick to owning rentals instead (2 rentals).

My personal residence is rented, and I share the cost of the house with roommates which makes living very cheap (438/mo for my room/bath). That is a total no brainier for me right now so I can buy more rentals. Don’t have kids, so that makes it easy to be mobile.

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Des

@Dan (#105)

I appreciate how meticulous your calculations were, but you left out what rate of return you’re assuming you’ll be getting form the stock market over those 30 years. Can you provide that?

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Crystal

I don’t understand all the people that posted that a house will put an end to their traveling lifestyles…

My husband and I are 26 and 27 respectively and have no kids and no plans for kids in the future. We own a home. We make $78,000 a year combined and live on $38,000 of that (including the mortgage and overpayments). We don’t spend our weekends slaving away on the house. We travel. Why would the house keep us from traveling?

Maybe I’m not understanding the posts…are you talking about vacation travel or about moving all the time? If you are moving all the time, then I wouldn’t want to own a home either. If you’re just vacationing, why would the house keep that from happening?

@TeresaA
The scenario you described had you saving at least $125,000 by owning a house. That $125,000 could have been invested in the stock market just as easily as the money you “saved” month-to-month by renting. You obviously don’t want to own a house, so why create the scenario to start with?

By all means, don’t buy a house. We are renting ours out once we move and will have another rental property by then too. I would love for lots of people to need rentals. I was just showing you that if you’re going to live in one place for 20 years and the housing market isn’t like NY or CA, you will save money by owning a home. That doesn’t mean that you should own a home, it just is what it is…

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Sam

As a homeowner and as a real estate investor (who has tenants), it will be interesting to see how the post-bubble market plays out.

I think most people who visit GRS understand that tenants pay things like mortage interest, real estate taxes, insurance, repairs, upkeep, etc. but that they just pay it via rent. So renters really have similar costs they just don’t see them broken out.

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Dan

@104 (The Broken Penny):

One thing that article misses is that correlation does not equal causation. The author’s premise is that owning makes people rich. But what if it’s the other way around? What if rich people own and poor people rent?

Take me for example… my income is borderline on the top two brackets. But I have a negative net worth. I don’t have a negative net worth because I rent instead of own, but I rent because my $400/mo student loan payments (which will jump to $650/mo or so in a year or two) take a big bite out of what I could put into a house. (If I didn’t have those student loan payments, I could either buy a house and establish some equity, or invest in stocks and increase my net worth that way.)

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Shara

btw, many of the homeowners don’t seem to take into account transaction costs. Broker commission, inspections, and other costs are 8-10% of the sale price of the property (unless you do something unconventional like FSBO). That is why 4 or 5 years is typically estimated as a break even point, historical appreciation is ~2%.

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Tomas Stonkus

I am glad you caught this too!

I was just talking about this with my brother a couple of months back. Buying a house financially just does not make sense for most people.

There is much more clever math that you can do to figure it out. Assuming that you monthly ownership cost is $2,000 and renting would cost $1,000 and if you have enough money, you could easily invest that $1,000 into the stock market or else where and eventually save up enough money to buy a house.

Another thing that you have mentioned that is true is this: mobility. You have none when you own a house, if you want to move you have sell it, which causes a ton of other issues and costs tons of money.

The only way owning a house makes sense is if you want to want to pass it on to your children, then you would be giving them a huge heads up in life. So it’s a great estate planning tool.

There are many more issues to consider when buying or renting a house and the great thing is that it all can be calculated 🙂

Anyways, thanks for talking some sense into people 🙂

Best,
Tomas

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Honey

My boyfriend and I can’t imagine wanting to live in the same place for more than 5 years, ever. So owning just doesn’t make sense.

And those who say that ownership is a good idea and then use your rentals as examples, buying rental property as an investment is a TOTALLY DIFFERENT THING than buying your primary residence “as an investment.” A primary residence is a place to live, not an ATM.

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Shara

Am I the only one who thinks it’s silly to run numbers based on things 30 years from now? Depending on the assumptions I can show you when it’s better to rent and when it’s better to buy. Inflation of 5% for a decade, unexpected move, DE-flation for a few years, local factory/army base/tourist spot opening or closing, income tax laws changing (bye bye itemization), property tax laws changing, open-space laws changing…

There are so many things that will change. Some will be better if you’re renting, some will be better if you already own. You state your assumptions and decide for yourself. But that’s part of JD’s point, you have to consider the intangible and the mental calculations aren’t as straightforward as it often seems.

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Dan

I’m with Theresa on this one. I live in suburban Washington, DC.

I rent a 725 sq ft 1 BDR apartment for $1056/mo. Assuming my rent goes up 4%/yr (which is what it did this year), in 30 years, I’ll have spent $710,708 in rent.

If I want to stay in my immediate area, a townhouse can be had for $350,000. Assume a 6% mortgage, and I’m looking at fixed payments of $2098/mo. Property taxes are assessed at $1.04 per $100. Assume an additional $200/mo in maintenance, HOA fees, and increased utilities. Assume all non-mortgage expenses (and the value of the home) increase with inflation — I used 3%.

In 30 years, my housing expenses will have totaled $1.07M, but my $350,000 house has increased to a value of $850,000. So, I actually have a net cost of ownership of about $227,000.

Now, if I have an $850,000 house in 30 years, I also have the money I wasn’t spending on home ownership. If I consumed it each year instead of saved it, I have about $366,700, putting me in the hole by about $344k.

However, if I were to invest that money in the stock market, that difference balloons to $1.8 million, putting me way in the clear by about $1M. Remember, buying that house cost me $227k.

As far as retirement goes, I’ll likely move somewhere much cheaper than the area that I live in now.

In reality, my wife and I do talk about buying that townhouse “someday.” But we also talk about what we would have to give up to pay that extra $1,000/mo, and right now, it’s not worth it to us. We plan to travel like that guy mentioned above… this year, we’ll be spending a month in SE Asia. I can’t say I’m willing to trade that for a house.

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The Broken Penny

JD, The problem with renting is that the money you spend on rent will never be recouped. Money spent on mortgage payments will most likely be returned with a profit. So even if rent is half the price of a mortgage, it is money that you will never see again. The only way you could possibly do better renting is if you were an awesome and dedicated investor who did not blow the extra money you save from not paying a mortgage. Tax deductions are also in favor of homeowners.

Additionally, when you rent you will never pay off your rent. It will only go up with inflation. You will never have an asset to sell. And, you most likely will have spent the extra money you could have saved by renting. A mortgage is a forced savings account. Most would not have the dedication to save as intensely as your mortgage forces you to.

Are there renters that are rich? Yes. But I suspect they would be wealthier if they were home owners. Despite the recent downturn in real estate, if you plan on living in your house for more than 10 years its a good investment. On average homeowners net worth is $166,000 dollars greater than renters according to Liz Pulliam Weston

I’m glad you included the link to the 2007 CNN chart showing the rent ratio. After 10 years in Portland I moved to the Bay Area, in 2006. I figured I couldn’t afford a home in either place, so why not? It’s true that in 2007 the P/R for Portland was 20.7 and for the Bay Area it was 50, but unaffordable is unaffordable, no matter how you slice it. (Yes, my new salary offset the jump in living expenses.)

I am firmly attached to the 2.5x annual salary for an upper limit on housing price. I think it’s a very sensible rule of thumb, and it also means I may never be a homeowner, unless I move yet again – but I’m slowly coming to terms with that.

I can’t wait to read all the comments. Thank you for being another reasonable voice in the rent vs. buy debate!

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Avistew

I think one element that is important is that, in my experience at least, people buy bigger places than they’d rent.

As a result, even if the prices would be comparable, they spend more buying than renting, because they go for a bigger place.

That can be a problem if they don’t actually need or want more room, obviously, but are just following the “bigger is better” they heard other people say.

Renting is definitely the way to go for me. I had a friend who told me “but buying is like renting, except in the end you’ve got a place! Even if you move out, you can sell it and make a profit!”.
That might work for her, but the way I see it, when you buy, you pay interest on a credit, on top of buying the place itself. Later, when you sell, you might sell for more, or less, or the same price, but you’ll have to find someone to buy. What if you don’t?

I like moving, I have never spent more than 3-4 years in the same place, and often much less than that. On top of that, I live with just my husband and we don’t intend on growing our family. And we like small places. So renting makes the most sense for us.
I can’t deny that if I could afford it (as it, pay upfront), I’d buy my ideal apartment… If it exists. It can be a pain dealing with some details, such as the fact that rentals here all seem to have carpet floors when lino is more practical to clean, looks better (in my opinion) and of course doesn’t give me allergies.
But every time I’ve looked around, condo fees were at least as high as rent, and that was on top of buying it. No thanks.

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real_money

Why not live rent free? How would your quality of life be if you did not have to pay for rent?

Why not buy a three bedroom house and rent the other two rooms to pay your mortgage? Think outside the box. Or better yet rent all three and live in the bastment, that way you have more privacy.

Do what other people are not doing, or do not want to do.

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Nate

JR (@99) — that P/R is CRAZYYYYYYYYYYY!!!!!!

My P/R is about 9.5 here in Columbia, SC… I purchased because my payment (including taxes, insurance etc. etc.) is $750 a month. Renting is actually quite higher than that.

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Jamie

We’re in the process of moving from a (small but decent) home that we rent for $200 per month to a (much bigger) home which we will be caretaking for free (but paying utilities, internet, etc). For us, renting is definitely the best option while we work to free ourselves from the constraints of debt.

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JR

My P/R is 36.5! That’s $1200 rent and $525,000 equivalent purchase (is my math correct?) San Luis Obispo, along with the rest of the central coast of California, is completely insane.

We’d really like to own a house, for many reasons, but it’s just not going to happen unless the market fundamentally changes. It’s not worth burdening ourselves with crushing debt… sales are close to a standstill, so maybe I’m not the only one coming to the same conclusion?

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Jane

I guess I would say if you don’t feel the itch to buy and are happy renting, then all means don’t let someone try to convince you to buy for financial reasons. But I think a lot of people are like me and are tired of living in someone else’s home. Yes, there are perks to this, but ultimately if you are picky at all about your household and like things a certain way, it can be difficult to rent. I can’t tell you how many bad sinks, faucets, wet basements, weedy front lawns, etc. I had to deal with over my many years of renting. The reality is that unless you rent in a new complex or pay more for an expensive rental, you are living with cheap fixtures and materials. This doesn’t even go into the issue of neighbors who share a wall with you. For us, it was worth the extra expense to buy our own home because it dramatically improved our quality of life and enjoyment of our surroundings on a daily basis. Isn’t that ultimately money worth spending?

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Des

@TeresaA (comment #91)

$125,000 over 20 years doesn’t sound like much savings to you? Sounds like a boatload to me.

Not to mention you then live rent-free for the rest of your life. If you’re 40 now and you pay your mortgage off in 20 years you’ll be 60. If you live to be 85 (and if we assume you rent for the same $1,000 a month) there’s another $300,000 saved. In all likelihood, rent will be significantly higher 40 years from now, so that figure is grossly understated.

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Lisa

Formerly Very Happy Renter Getting Wealthier That Way, but buying a townhome this week.

Only two reasons:
1) The first-time home buyer’s tax credit I can grab for the extended $6,500 (owned a home for 5 of previous 8 years) will pay my closing costs $2,500 plus some.

2) The paltry 1.5% before taxes I’m getting on $50,000 nest egg that I’m plowing into home equity instead.

All the appliances are upgraded, and the townhouse is 1400 square feet.

The way I figured the advantages are fairly simple, –and geared for English majors afraid of math and money! You are welcome to view at

For the next 10 years, for most people renting will be the better financial decision than owning a house.

I have written extensively on this topic for years and it is sad that it took a financial meltdown for people to run the numbers and realize that you only make money owning a home as long as prices are rising. Those days are over.

donovan
spiritnewsdaily.com

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partgypsy

This is the kind of article I should show to my sister, who feels she is losing out because she is not in a house. However she, and I myself know, than many of the benefits of home ownership are nontangible. I really liked the house I was renting, but I couldn’t paint the walls and didn’t want to buy window treatments for a rental, our garden would get mowed down by the maintenence people, and the neighbors would throw stuff in our yard because there was no fence between the two properties. Plus, my husband enjoys DIY projects but couldn’t do anything while we were renting. The rent to own ratio is not as important as a) knowing and fulfilling the reasons why you want to have a house, and b) whether you can afford it.

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TeresaA

Crystal and Luke,

I still don’t see much of a “savings”, if any. And what if I were to save and invest the difference between the money I do pour into home ownership for the twenty years of the mortgage ($700.00 per month) if I rented instead? That would be a pretty tidy retirement fund, plus I could then buy a house for cash. How much do you have to save and invest per month for twenty years to be a millionaire?

I think we have been sold another “bill of goods” when it comes to home ownership.

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Nicole

#81 Charlie: Why? An 800 score won’t get you any better a deal on anything than the 785 you’re posting.

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Lars

Most apartment complexes allow you to break your lease by paying a month’s rent.

And buying a house to have a place to live in when you retire? That doesn’t make too much sense to me. Life circumstances tend to change. A five bedroom mansion makes sense if you have a family, but as a retired couple or even alone, that’s way too much house. My idea of retirement is having an RV and roaming the country, or hopping from country to country, staying half a year in each city until it gets boring, all paid for by an investment portfolio that pays regular dividends. I don’t know if that’s a sign of poor education?

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Luke Hartman

BeforeWisdom,

I noticed this too. I’m not sure where people are renting from that they can leave whenever they want.

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beforewisdom

I was taught that you buy a house to have a place to live in when you retire…not as an investment.

I was taught that a 401K is for long term stable savings…not playing the stock market.

Over the last 10 years I’ve seen popular articles state that people have been relearning these two rules.

How did it come to that? Poor education? Greed? If they wanted to invest why not do it directly after they have saved up an amount of money to gamble with?

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beforewisdom

There is something called a “lease” with apartment buildings. You can’t, literally, move any time you feel like it. Granted, it is easier to break a lease then sell or buy a house.

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Luke Hartman

TeresaA, I’m with Crystal. Those costs go up for whoever owns the home. If you’re renting, it’ll just get passed on.

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Crystal

TeresaA,
That $9000 or more a year for everything else will still be cheaper than whatever rent will be in 20 years because a landlord will definitely make sure to cover those costs.

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brooklyn money

Thank you so much for this post! I feel like I don’t really have a choice as I can’t afford a two bedroom apartment and don’t want to get stuck in a 1 bedroom and have to worry about outgrowing it. It’s nice to get some validation from someone I admire that I’m not a financial mess because I rent.

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Crystal

TeresaA,
In your scenario, you have a $225,000 house in 20 years that you paid $340,000 for…you “wasted” $115,000. In the same 20 years, you “wasted” $240,000 in rent.

That means that owning the home “saved” you $125,000.

Plus, after those 20 years, you own a $240,000 home without a mortgage. Your cost of housing would be reduced to taxes, homeowner’s insurance, and maintenance expenses.

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Charlie Boy

I rented in the past, and I am proud to say that I was the best renter who ever walked the earth because I paid early AND left the place BETTER than I found it. We never wore shoes in the house, and we treated it with love and respect.

I was surprised to see that the financial disparity is not that great between renting and owning, however, there are too many other benefits to home ownership (non-financial) that I see.

Stability, as mentioned, privacy, and many other subjective issues

But a very informative post

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TeresaA

Luke,

But there will still be property taxes, insurance, repairs and maintenance even after the house is paid off. At my current figures, home ownership will still cost me $9,020.00 per year. And all of those things are likely to increase as well.

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Lars

It looks like a lot of people still make a cardinal mistake when calculating renting vs. buying. It’s just not enough to compare your monthly mortgage payments to monthly rent payments. And also, “Viola! After xx years there will be no more payments because the home will be paid off!” That’s one of the realtor myths JD mentions in the article.
Your equity is tied up in the home, and as JD points out, stocks historically outperformed real estate by over 5% annually. Those opportunity costs need to be factored in.
And yes, buying a home is a leveraged investment, but I find it strange that in these days people still regard that as a good thing. I know it’s crazy, but it can go either way. Yes, houses can lose value, and yes, you might be forced to sell during a downturn, and then this leverage can bankrupt you.

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Bear

Some of the folks that are advocating buying over renting because of the flat mortgage amount vs ever increasing rent are missing the point. The national average is that people move every seven years or less. Unless you are someone who is definitely, definitely, definitely going to stay somewhere forever, renting is a better “financial” decision than buying. It always has been, always will be.

While the mortgage may be flat, all of your other home ownership costs are going up. Taxes go up, insurance goes up, the cost of roof repairs go up, etc., etc., etc. That’s exactly the same reason rent goes up, the landlord’s mortgage is consistent (usually) as well but he has to raise the rent as his operating costs increase. Trust me, as a landlord with up to 25 properties at a time I know this painfully well.

If you can’t guarantee you’re never going to move then rent, save the difference between your rent and a mortgage and then buy a house free and clear when you decide to buy your “final” home (or at least one you’ll be in for 10yrs) and pay cash for it.

As for us, I’ve owned many houses for profit, homes for living and investment properties (condo’s, apartment complexes, etc.). We’ve done the analysis repeatedly and even in the strong RE market we experienced in the recently we lost money on each home (not investment props) in the long haul. If you truly track all your costs, your purchasing cost, your net interest costs (after tax benefit), your operating costs, your maintenance costs, your repair costs, your replacement costs, etc., etc., you’ll see every time that financially you lose.

I think the real issue is that renting has developed the societal stigma that is unjustified. As a result subconsciously people have an opposition to renting they cannot even articulate. It gets translated into verbiage like “security”, “my own place”, go ahead are reread some of the ownership posts above and you’ll consistently see these and other phrases that we’ve internalized and didn’t even realize.

I’ve come to learn (after many years) that I can make a beautiful home anywhere, regardless of whether I own it or not. It’s ALL about your attitude, not whether you own it or not. There are plenty of owners that can tell you nightmare’s of disastrous repairs that ruined them financially, horrific neighbors that they trapped next too, reversals in the neighborhood that dropped values, etc., etc.,and now economic disasters that led to owners being upside down on their mortgages!

While it is about what’s right for you maybe it would be good to very openly and honestly evaluate why you feel the way you do. Are you just tired of the throwing your money away comments, did your parents drill home ownership into you as a marker of success, etc.?? Take a step back and look at it with a very open mind, get an objective friend to help you question your premises for ownership.

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Nile

I have recently seen many articles like this that show that renting is financially as good as buying. After crunching all the numbers, every article has left out a huge, glaring fact: With buying, you have the potential to save or use the equity you have saved up…roll this over into your next home and work toward a no-mortgage existence. How huge is that? There is a risk of buying and loosing money on repairs and taxes and such. However, with renting, you loose every penny of your rent every time…no exceptions…100% reliable loss. These articles I have been seeing like this should say, “Renting is convenient if you don’t mind loosing your rent every time.” I’ve been a student for the past six years which has required regular relocations. I would have loved to have purchased instead of having to rent. With repairs, taxes and even the economic downturn causing lower house prices, there is no way I could have ever lost $72,000 (my rent bill for this time period). If I purchased a new furnace ($5,000), roof ($12,000), Refrigerator??? ($900) and lost $20,000 on the sale because of the economy…I’m still coming out over $35,000 ahead. Please correct me if I’m wrong…I’m trying to understand what people are trying to say about the equality of renting to buying but I just can’t see it.

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Bob

Sure, the idea of using the P/R ratio to determine if it’s better to rent or buy makes sense, but only at the time you do the comparison. The rental price will rise year after year, while your mortgage payment will only rise by the amount of property tax increases. My parents, for example, now only pay roughly $3000/year for a $100,000 home because they have paid their mortgage in full. They could never rent for that amount.

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chacha1

@ Shara #62, totally with you.

Re: myths, perhaps people would be less defensive if we called them “dogmas.” The three statements J.D. highlighted are opinions, not facts, and are easily countered OR supported, based on your personal values and assumptions. For example:

“Renting is throwing money away:” No, it is exchanging money for a place to live, and sometimes can represent significant savings over buying. DH and I currently exchange $2400/mo in rent for a place to live that would cost us over $4000/mo to buy (identical floor-plan across the street) – plus maintenance, plus HOA fees, plus property taxes/insurance, so really closer to $5000/mo – PLUS we would be committed for 30 years to never move, or have to gamble on getting our money out when we do move.

“Owning your home is a forced savings plan:” Not unless you sell your home for as much as or more than you’ve paid, INCLUDING improvements, interest, etc. What it IS, is an excellent way to lock down your fixed living expenses … and as such, is probably the best choice for MOST people if they are able to PAY OFF the home prior to retirement.

“Home ownership is a path to wealth:” Not unless the home itself gains in value at the same time that owning the home permits you to accumulate cash, and even then only if your primary definition of “wealth” is money. I’m sure Chris Guillebeau feels pretty wealthy without owning a home.

DH and I want to own a home for retirement. Ideally this will be a fairly small, low-maintenance house, with a little bit of land, in a mild climate, so that we can have the lowest possible fixed expenses and be as self-sufficient as possible in energy and food production. Those are practical reasons for buying a house … and I really think people would benefit if they looked ONLY at the practical and took all the emotion out of what is typically the biggest financial commitment of a lifetime.

Here in CA, the real estate market continues to slide. For those of us who DIDN’T buy when everyone was telling us to, a big opportunity is opening up. We will be able to find a property we want, in the area we want, at the price we want, because so many others saw housing as a get-rich-quick scheme instead of what it is: a place to live.

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Luke Hartman

TeresaA, did you consider that in 30 years you will have spent 120,000 more in mortgage (if your rent doesn’t go up, which it will) while you will have a 200,00+ house paid off? That seems like an advantage of 80,000k to me (before adding rent hikes).

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E

This is a really interesting article.

We moved about every 3 yrs when I was a kid. Nevertheless, my parents only rented when we were overseas. They took a hard hit on one house – dad’s office closed after only 1 yr – but they must have done ok overall because dad is in fine shape today and has helped 2 of us buy our own homes so far. Of course he was lucky too; the previous house he was in for 9+ yrs, sold at the top of the boom, went overseas for a few years, and was just able to buy an awesome house in a depressed area. Talk about buy low sell high! whew!

For ourselves, we bought for several reasons. Rents were comparable to the mortgage we got, and our house is better than anyplace we saw while renting. We also haven’t had the best luck getting landlords to actually DO anything. In addition we have two big dogs, always a drawback when trying to find a place to rent. Finally, we were really ready to settle down and STAY someplace; one of my goals in life is to live in one place for 5 yrs. (haven’t done it yet but we only need about 9 more months!!!)
It’s not perfect. There are some drawbacks. But I don’t think we could do better with a rental, money-wise or any other way I can think of.

Thanks for the great discussion. There are tons of situations where renting is better; we just aren’t in one of them right now.

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Nicole

@71 Debbie: “Buying a house is only forced savings if you are not allowed to keep refinancing and cashing out any increase in equity or taking out huge lines of credit like enormous numbers of people were doing before the crash”

That is true. Fortunately it is only a recent phenomenon and banks have become more cautious. Also, some states (like TX), only allow you to take out a certain percent of home equity as a loan.

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TeresaA

Great Post. I have been thinking about this a lot lately.

We “own” a home. Mortgage is $875/month, insurance $62.00/ month, property taxes $308/month, water & sewage $32.00/month. This year we paid $85.00 to repair our stove, $350.00 for a leaky water line, and $450.00 for a new hot water tank. I have no idea what we spent on miscellaneous home and yard maintenance (sorry JD) but let’s say a conservative $500.00. That comes to a total of $16,709 for the year. We’ll assume that there will be repairs and maintenance every year, some higher, some lower (last year we needed a new roof at the tune of $7200.00). So let’s say owning a home averages us $17,000.00 per year. Or $340,000.00 for 20 years. My home will not be worth $340,000.00 or more in 20 years. I would say it would be more like $200,000 to $225,000. I will lose a lot of money.

If I rent a house for $1,000.00 per month, the maintenance, insurance and property taxes, etc are someone else’s problem. I spend $12,000.00 per year, or $240,000.00 over twenty years. Even if my rent increases, which it probably will, I figure I am still ahead.

Am I crazy….or am I missing something?

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Debbie M

Buying a house is only forced savings if you are not allowed to keep refinancing and cashing out any increase in equity or taking out huge lines of credit like enormous numbers of people were doing before the crash.

@Shara (62) – excellent point. I am STILL acquiring this mentality.

@KF (63) – good point about the brainwashing, too. We are also brainwashed to go to college if at all possible, get a good job, get married (to someone of the opposite gender), and have kids. Who knows what other brainwashing I have that I don’t realize. Sometimes it’s really hard to see what your options really are and what they could be like.

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brian

Please don’t forget the cash impact of tax deductible expenses. If you already itemize, or your mortgage pushes you over the top, it can change the calculation. This is especially true in parts of the country with high property taxes. If you can change houses and at least break even on each sale, you are still money ahead. Although its possible to find a landlord that doesn’t cover their expenses with rent, it would seem to be unlikely.

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Steve

Sometimes you can come up with a P/R ratio on the exact place you are living in. At least in my case, I know my monthly rent and I can look up the estimated price of the house on zillow. According to that I have a P/R ratio of about 16.

As I mentioned, I (and my wife and upcoming baby) are renting right now. The numbers are getting a little more reasonable for buying than they used to be in my area a couple years ago. But as everyone says, it’s not just about the math (as much as I truly do love math.) In fact I think the biggest impediment to us buying may be my emotions – my reluctance to commit to living on this side of the country, and give up hope of moving back to the East coast where both my family and my wife’s family live. As long as we continue to rent, we’re only locked in to living away from our families for one more year.

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Big Spender

The real estate website HotPads.com has a good buy-vs-rent calculator as well -http://hotpads.com/mortgageCalculator.htm – and it allows you to search for homes based on monthly payment, both rentals and for-sale to compare.

“I went to the Home Depot the other day, which was unnecessary… I need to go to the Apartment Depot, which is just a big warehouse with people standing around saying ‘hey, we ain’t gotta fix [crap]!'” – Mitch Hedberg

As has been said on this site numerous times, buying a house will be the largest purchase most people ever make. Therefore, it’s very important to get it right — and like most important decisions, it’s not an easy one to make. I think the point JD was trying to make is that a TON of factors go into whether it’s right for you. I rent, mostly because I’ve been actively looking to find another job, which would almost certainly require me to move — so owning isn’t an option. Sure, I could have been building equity for a few years now, but then what if I move and can’t sell the home? What are the costs of having to rent elsewhere while paying this mortgage, what if I rent the home and it gets trashed, or what if the numbers just don’t work out enough that I could take a job in another area. Surely all of those costs would eat away at the equity if not put me at an overall loss.

Additionally, there’s the risk of buying at the wrong time — as anyone who bought maybe 5 years ago knows. But, as mentioned above, what if inflation gets out of control and the cost of renting doubles in 2 years?

Beyond the savings/equity argument, there are plenty of other financial issues as well. Older houses are cheaper, but they often require a lot of work. Hiring help is expensive, and certainly less efficient than the share you pay for the full-time maintenance person on staff at many apartments. I’m pretty handy, so if I need to replace or fix something, it’s not too expensive. But many people aren’t, and every time you need something fixed, it’s $100/hr to have it done. And then there’s mowing, snow-removal, etc… that either takes time or money, or both.

And the psychological factor is huge. I grew up in a house where our yard was about 1/4 of a city block. I now share a “common area” with 100 others. Not being able to watch a loud movie a midnight in an apartment is a big negative. So are neighbors sharing a wall. But what’s a trash shoot worth to avoid taking out the garbage in the winter? All of these things have a dollar value and should go into the overall decision.

Long story short, it’s very hard to know if buying a house is the best decision for anyone other than yourself.

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Geek

I find it odd that The Tim hasn’t posted P/R in a while… hmm maybe you should ask him for a roundup!

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Tyler Karaszewski

haha, “For example, say you find a $200,000 house for sale in a nice neighborhood.”

Oh, wait, that’s not $200,000 at all. Based on your 2.5x number, I only have to be making $350k/year to afford hat house. Housing prices are ridiculous.

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Chris

This article confirms one of the main reasons my wife and I continue to rent. Although we’ve only been married a few years, family, friends, work colleagues, and society in general has been pressuring us to buy a house simply because that’s the thing to do.

Every year we do the math and the numbers always tell us now is not the right time. We’d rather put the money we’re saving on rent and potential home ownership costs toward funding our IRAs, paying down graduate school debt, and having a baby. Plus, we are planning on relocating for work over the next couple of years and we want the freedom to pack up and leave whenever the opportunity presents itself.

J.D., thanks for reminding your readers that sometimes going against conventional wisdom makes better sense than following the crowd.

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KF

I love that renting lets me afford to live in a neighborhood where I could not afford to buy.

It is amazing how brain-washed Americans are about home ownership, to the point that it seems many don’t even consider renting. They buy a home even when they might only be in a city for a year or two. And we seem to have internalize a notion that profiting on a home is a fundamental human right. I wish more people realized that homes are investments, and investments can make or lose money. I wish more people would also realize that they definitely should not buy if they won’t be in the home for 5-10 years, preferably even longer.

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Shara

JD, you jumped around it, but I would like to explicitly state, that there is a MENTALITY that has to go along with being a homeowner. When we bought our first house I had an awful time getting DH to understand that, when you own a house, deferred maintenance is eating away at the value of YOUR property. The costs ARE yours and if you don’t want to pay a plumber $300 you’d better understand what CAN and CANNOT be flushed (my old roommate flushed paper towels as she was cleaning, *shudder*), and why it is a bad idea to just toss bacon grease down the drain. One day I was packing a two week business trip and we were having a fight about getting things done and he asked me what I wanted him to do while I was gone and I told him, “Pretend that it’s YOURS!” It finally got through to him that part of his responsibility was knowing what needs to be done. The other part is doing it.

Some people don’t want to learn these skills and take that responsibility, which as you pointed out is a completely legitimate choice. But what drives me crazy is people who not only don’t take into account what it will cost to do your own maintenance, but don’t DO the maintenance. As we look at investment properties you can often tell the ones that people are getting out of because they shouldn’t have owned a home in the first place. Immaturity, laziness, ignorance, or just in over their heads. No matter the cause it’s very sad to see a place fall to crap and lose value because it’s not taken care of, or it’s patched together because someone is cheap or doesn’t know better.

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Crystal

I will agree that renting is usually cheaper per month than buying. If you are going to move around or just don’t want to deal with home maintenance, then renting is totally for you.

My husband and I got sick of our rent being increased by 10% at the end of every lease, having crappy appliances all the time (like a dishwasher that couldn’t clean rinsed-off plates), hearing our neighbors music through our walls, and having to pay huge non-refundable pet deposits ($300-$500) for a well-trained, clean, quiet, middle-aged Dachshund mutt.

We were renting a 1050 square foot, 1 bedroom apartment in Houston, TX for $730 a month in 2006. Our 1750 square foot, 3 bedroom home was bought in 2007 and is about $990 a month for the mortgage, taxes, and homeowner’s insurance. We also spend about $850 a year on maintenance costs that we didn’t have in the apartment – $380 for annual lawn service, $320 for annual pest prevention, and about $150 on things that need to be fixed…it really is cheap if you do it yourself or know the right people. It also helps if you find a home that is in great shape to start with…ours was less than 5 years old and hasn’t had any major issues yet.

In short, we pay an extra $3970 a year for 700 extra square feet and none of the problems we had when renting. When we do move, our house will be worth something.

We got $0 after moving out of the apartments we paid about $18,000 to live in for 2 1/2 years.

By the time we pay off our house (no later than 2018…11.33 years total or less), we will have put in about $145,000 for the mortgage and interest, $27,500 for the taxes, $9000 for homeowners insurance, and $15,000-$20,000 in maintenance costs if we replace the A/C, the water heater, a couple of major appliances, and continue paying for lawn and pest services. That comes to no more than $201,500. If our house appreciates 2% a year for the next 11 years, that is about $160,000. That means we will have “wasted” about $41,500.

If we had rented for $730 a month for 11 years, that comes to $96,360.

By owning our home, we will have saved at least $54,000 in 11 years plus we will not have a mortgage payment again until we choose to move.

Yes, renting is cheaper short-term, but it really is money that you will never see again. Buying a home should never be seen as a money-making investment, but at least it gives you something tangible.

I would say that each person needs to take a close look at the numbers in their area to see whether owning a home is the best idea. My husband and I will never rent again.

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Nicole

#50 Troy– your argument is ALMOST what my students get in public finance, but you’re missing the last piece which gives it the exact opposite bottom line.

In general equilibrium, everybody with the capital to buy a house for renting has a choice to buy housing or put that money in the stock market.

If buying housing is more profitable, they will flood the housing market until it is no longer more profitable than the stock market. Once the rate of return from real estate is equal to the (risk and hassle adjusted) rate of return from the stock market, the market will be in equilibrium.

On average, buying rentals and putting money in the stock market will give you the same rate of return.

Of course, individual housing markets are in constant flux, so sometimes you’ll lose money and sometimes you’ll make it big. But there’s no one heuristic for whether you should rent or buy in all markets. JD’s article is then correct on mostly all points.

There is a general heuristic that if you’re staying put for 5 or more years, you’re likely to recoup your transaction costs and the market will likely be higher than when you bought, so it is likely that buying is better than renting in that scenario.

(Our house has been going up steadily at 2%/year…. not as good as the stock market, but we have the benefit that we don’t have to live near college students, for which we pay a premium.)

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Teresa

Who vacations in Duluth? I use to live by there and it is not a town I would vacation in 🙂 Hahha – just kidding 🙂 Right now I rent and while I would love to own my own place because I have a job and love the city i live in..i really does not make sense. I love being able to call in the landlord when something goes wrong, though sometimes I wish I could paint and have a cat..oh the dilemas! I think we are all fortunate to have this dilema alone 🙂

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Amy@MD

I think that renting or owning a house has to be considered with the current local market of rent price vs. own price, properties taxes and so on. We did all kinds of calculations and decided to buy rather than rent.

We bought our first house because with the same amount of monthly payment (around $2400~3000/month), we could:
– rent in a very small town house or probably just an apartment at downtown Silver Spring in a nice neighborhood, or
– pay a mortgage plus all extra fees such as property tax, insurances, security system, to own a house in a nice neighbor near Silver Spring (20 minutes driving).

The extra benefits that we have been receiving from owning the first house:

– good feelings: we have a house of our own. Don’t have to pay extra rent of $25/month just because we have a cat. My husband and I both enjoy working for our house like having a garden, building a shed here, planning on building a sunroom there, etc..

– we have tax deduction as we don’t have to pay tax on the amount that used to pay mortgage interest. I don’t think people can have tax deduction on the rent money.

– In the long run, we have what is called “house equity” – this is I believe the “throw away money while renting”.

All of the benefits that we have by owning the first house actually had helped us to save enough and bought a second house last year.

Now, if – yes, if – we worked and lived in not-crowded-area VA, we should rent instead of own a house as the rent is awfully low in suburb areas. One of our friends is paying for around $300/month renting for a big house, not a condo or an apartment – a real house in more than 1 acre lot. But that is just an if to us, we can’t deal with spending at least 3 hours in traffic every day (with no traffic jams) back and forth between suburb Fredericksburg and DC.

I have read above that some people complaining about fixing things around the house. Any house/condo always needs maintenance and once you live in it – rent or buy – you will have to pay in order to keep it working for you.

This is actually a good time to find a good house to buy, so buy a good house instead of buy a fixer-upper, and buy a house or at least a townhouse instead of an apartment or condo in big buildings. We bought our first house as-is because that was when the market was still up, it was cheaper to get a fixer-upper house at that moment. However last year when shopping for the second house, we found plenty of inexpensive nice ready-to-move houses. It actually was hard for us at first to realize that we could buy a house and do nothing except sitting back and enjoying it. Our mind were still set for “buy and fix would be cheaper” even though the market had been down for awhile.

PS: I said buy a house or a townhouse, not an apartment or condo in big buildings as I was so fed up with living in blocks. My neighbors cooked plenty of smelly foods, another neighbor couldn’t deal with the smell so she tipped toes to the hall at night and sprayed Freeze in the air – which didn’t help my nose, a young guy next door always played music loudly, I accidentally ruined my one-floor-below neighbor’s bedroom decoration because I had forgot to turn off water for the bathtub.. such and such.

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Delphine

I live in LA. It definitely makes a lot of sense to rent. Renting is so much cheaper than buying that the difference is baffling.

However, I still want to buy even though I know it doesn’t make financial sense.

I’m just tired of cheap windows, lack of storage, cheap kitchen cabinets, and not having adequate covered parking spaces.

Now that I am finally at the point in life where I will be settling down in a year or so, I am going to house hunt as soon as next winter rolls around.

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Nicole

I am 23, bought my house on a 30 year fixed a year ago. My house will be paid off before I am 40. So, if I stay where I am I will be living rent free for the last half of my life. If I decide to sell, I’ll be moving to a smaller home (we bought big, since the market is down). Our house has already appreciated 10%.

I don’t look at my house as a “forced savings plan.” Its a dwelling when I can live, not have to worry about my mortgage going up, and since the mortgage is only 20% of my net income (and thats paying extra on principal) and I can assume my income will raise at least 3% a year, this means my house will seem cheaper.

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Nicole

I agree with everything in this article, except one thing. The statement that “Buying a house is forced savings” is not a myth. For far too many Americans, home equity is the ONLY wealth that people have at retirement (and not just people in million+ dollar homes). Alexandra #23 is right. Many of these people would not save the difference if they did not have a mortgage. The mortgage is forced saving.

The forced savings of home ownership is something generally agreed upon in the academic economics community, among both retirement and housing economists, so I’m not sure why anybody would think it is a myth. Yes, there are a lot better (more diversified) ways to save, but if you’re not going to save without it, it is better than just having Social Security or SSI at retirement.

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Still confused

There’s one part of this argument that always confuses me. Isn’t comparing a return on a home vs. return on a stock comparing apples vs. oranges?

If I buy a $300,000 house and it appreciates 1% each year, that’s 1% of $300,000, and then it compounds.

If I rent and sock away what I save by renting, say $500/month, put that in stocks, and got the 6.8% return you mention, that’s 6.8% on $500, which I add to each month.

I know there are enormous costs associated with borrowing the money for the house (some of which can be mitigated by paying the loan down early), but if you did a side-by-side comparison over 30 years with this scenario or others, what would be the net difference? How much money (equity) would I have in my home vs. how much money would I have in the bank (so I don’t have to worry about being homeless in retirement)?

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Landlord who Rents

I want to clarify that I am pro rent, but in a nice community that is professionally managed not from a private landlord…too unpredictable.

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Troy

The problem with this is the assumption that renting is somehow cheaper.

over time it isn’t. Ever.

The decision needs to be based on timeframe. As others have said, it your situation is temporary, renting usually make sense.

But renting usually makes sense on all temporary things. A car on vacation. A moving truck. an airline ticket.

You rent all of these becaseu the use is temporary. If your living arrangements are temporary. Rent.

But if your living arrangements are a bit more permanent, or if you have kids in school, etc, then owning always wins. Just like owning is usually better with cars, clothes, furniture, appliances and anyhting else you use regularly and permanently.

That rental…someone OWNS it. All rentals are owned by someone. Why?

They all make money, or are supposed to anyway. That is the entire purpose or being a landlord. Your landlord isn’t losing money by renting to you. He owns it for $700, and rents it for $1000. He deducts the depreciation. He wins, not you. Not over time. 15 years from now he still owns it. It is likely now paid for. His expenses have gone way down. Your rent has gone way up. doubled. You still aren’t winning.

So, if your situation is more permanent, you are always better off owning than renting. The cost is fixed. IT does not increase with inflation. And at some point in time that cost ends.

Actually, the easist way to compare is to not assume there is a mortgage. Assume you have $200K cash. The house can be bought for $200K or rented for $1000 per month.

Your $200k invested at a fixed guaranteed rate of 5%, which is unlikely today only yields $10k per year, or $833 per month. Plus it is taxable income, so the net is likely $700-$750 per month.

Or you could pay cash for the home. No payment. No $1000 rent. You still have a $200k asset, but it grows TAX FREE. And you aren’t losing $250 per month by renting.

Over 30 years, that is a difference of hundreds of thousands of dollars. And if you still like renting, rent it out…to yourself.

I’d like to again second the recommendation of the NYT buy-vs-rent calculator. Easily the best and most thorough one on the web. Punch in the numbers for your specific area to see if renting is still the better choice in your particular neck of the woods.

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Landlord who Rents

Great article. We have purchased 3 properties that we lived in and now rent out. Fast forward 10 years later with 4 kids in multiple activities and a desire to have a life of my own that does not include paying for and cleaning a huge house, we continue to rent out the other houses and rent a small 3 bedroom for ourselves. I love renting because of the time it gives me, the flexibility to move (6 times in 10 years). However, we are not the best at socking away money so we plan to keep at least 2 of the rentals as ‘forced savings’ for down the road when we retire. Financially it we would be better off selling and saving the difference but we know ourselves better and know that we would not save enough of the difference in 20 years that would give us a steady income of $6K a month that we should have by then if we hold on to them.

Love the comments too! Oh and let me mention another pro of renting. I have a huge pool and small, but lovely garden and gym that I do not have to maintain!!!! My kids do say they miss the big house, but I explain that their activities and excellent education and mommy’s sanity come at a cost….so stop whining: )

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Lily (capital L)

I don’t know about the US, but in Italy the prices of houses and flats keeps going down, while rents are always the same (expensive, that is).
Maybe in the US buying is less affordable ’cause houses are quite bigger than ours…?

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Mike V

I have been a renter for almost 3 years. I have lived in two different one bedroom apartments, 700 sq. ft. It might not sound like much space, but it is more than enough for me.

I have learned alot about what I like and don’t like, and I can apply that knowledege to a home, when and if I ever buy one. Vaulted ceilings makes a small room seem huge and living on the top floor eliminates the footnoise of a stompy neighbor, it is worth a little extra money to be on the top floor. I live on a golf course with a beautiful view, for $600 a month, it is less than any home, on any golf course, anywhere.

I am financially secure and make plenty of money to buy my own home, but I chose to rent because I like the perks of renting (namely low maintenance). In addition to that, if I had a 1500-2000 sq. ft. three bedroom home it would simply be more space to heat and cool.

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Tracy

I agree it’s kind of a toss up when you’re working, and probably oftentimes renting is a better idea during your working years. . . but I agree with people talking about the difference between renting and having a paid off home during retirement. Has anyone done the numbers on saving the amount during your life for rent but then renting during retirement vs paying off a home during working years and then just paying for taxes, maintenance etc. during retirment?

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Debbie M

I agree that renting makes sense for lots of people (especially people who are about to move or who need to stay flexible in where they live and people who live in places where renting is much cheaper). I even agree that buying a house may not help you financially while you are paying a mortgage, especially if you keep refinancing to pull out more money. And although I do think that renting is “throwing away money,” I also think that financing a house is throwing away even more money. (Only $30 of my first house payment was going toward principal; the rest was all being thrown away.) Also it’s very hard to find houses as small as some apartments. And I should also mention that people tend to spend a lot more money decorating and personalizing places they buy than places they rent.

However, if you buy a house and live there for several decades, eventually you could pay off the mortgage. And when that happens, all you have to pay are taxes, insurance, repairs, and utilities. And because it’s your property, you can choose to make more updates that will reduce your utilities bills than you could if you were renting. You can also choose durable materials in your repairs to minimize future costs.

Surely just taxes + insurance + repairs will be less than rent. Right?

Meanwhile, when I bought my house in 1996, my monthly payments were $610 (+ repairs) and now they are $810 (+ repairs). If I were to buy my house now, even with the lower interest rates that are available today, I would be paying around $1,500/month. When I pay my house off in 2-3 years, that amount will be reduced by $505 (the amount of the principal + interest). So buying a house, when you know you’re not going to move (and I admit, no one ever really knows that) means that if prices go up faster than inflation, you can sell at a profit and if prices plummet, so do your property taxes and insurance.

Also, I would like to remind the house-owning readers that not all landlords actually fix things. Yes, it is their problem and not yours, but that doesn’t mean you don’t have to be living with a leaking roof while continually begging your landlord as they either do nothing or do something that doesn’t work followed by something else that doesn’t work.

Also, property taxes do go up with inflation and if you don’t pay them, you can get kicked out of your house. I like to think that if my taxes got too high to pay, then this must mean my house was worth a big pile of money, so I could sell it and move someplace cheaper. (Or it could just mean that the government is poor and raising taxes to compensate.)

@Meghan – I bought a house as a single person and usually have a roommate. You do have to pay taxes on this “income,” though, unless the rent you are charging is significantly lower than the market rate.

As far as nonfinancial issues: I don’t like dealing with the yard and repairs, but I do like being able to jump and dance (and even walk “loudly”) at all hours, not to mention play the piano. On the other hand, all my neighbors feel like they have to fill up their backyards with dogs or even roosters, not to mention weekly mowing, so I find things are actually louder now!

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Moneyblogga

I love the housing affordability calculator.

I plugged in the numbers for my current housing situation: 40% down, house purchased 50% below market at a foreclosure auction a year ago (even in today’s crummy resale market) and the calculator told me what I already know: Buying easily made sense.

Then, I plugged in the numbers for the house I used to ‘own’ before this one: a McMansion newly built for me 7 years ago and into which I threw money for 6 stressful years. With an inflated mortgage of well over half a million dollars at the interest rate I was being charged at that time of 9.75% and 11.25% for two loans I couldn’t afford, it NEVER made sense for me to have wasted my money so. But that was back in the day when I still hadn’t confronted my psychological problems with money. Unfortunately, it took me a long time to realize that I was ultimately going to lose my house, which I did when the bubble popped.

Things are a whole lot different today thank goodness!! I love my 1970s architectural gem far, far more than my ex-custom pile. Probably because I can actually afford it.

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Funny about Money

Mental telepathy! I was just about to write a post along these lines myself.

Unless you plan to live in a place for the rest of your life, buying may actually have more drawbacks than renting…or at least, so it seems to me.

My father, who was a merchant seaman, did not buy a house until he retired. We lived in rentals all the time I was growing up. When he did retire — at about the age of 53 — he had enough in the bank to buy a house and a car in cash and still finance his and my mother’s old age in the style to which they intended to remain accustomed.

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SG

Here in Europe, renting is far more common than in America, and it is also socially accepted. What I like about renting is that it gives me a sense of freedom and wealth: I do not have a mortgage, and I am able to build up savings which makes me feel good. That means, I am earning interest, not paying interest on a mortgage. Looking at my bank statements makes me feel rich. Looking at mortgage statements would make me worry about being able to make my mortgage payments in the future.

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Oleg Mokhov

Hey J.D.,

You nailed it with the bit about it not just being about money.

As long as people buy a house because they WANT to for personal and happiness reason – rather than for financial gain (which they obviously won’t get, as you point out) – then they should go for it.

It’s all about being conscious and having a clear reason for why you’re doing something.

Get the facts, see the big picture. Then do something only because you WANT to, rather than for some potential gain that probably won’t happen and will leave you unsatisfied.

Awesome to see more and more evidence that renting really is the smarter option for most people (especially young people in their 20s like myself). Confirms my suspicions… and gives me relief about not missing out by buying a house or whatever 🙂

Congrats on finishing your book “Your Money” and I’m excited for the launch of it.

Great stuff J.D.,
Oleg

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nmh

When we lived in Phoenix a few years ago people kept telling us we had to buy a house — that we were throwing our money away renting and we would seriously regret our decision. I can now say with total confidence we did the right thing. One of the reasons we didn’t buy was that we weren’t sure what we wanted to do in the long run. We now live in another state while my husband pursues a PhD — making that dream come true would not have been possible if we had been tied down to a house. Another strong reason was that we didn’t have a down payment saved yet — we were assured that this was not a problem and shown some of the ways that you can do 100% financing and how you could keep your payments really low with an interest only and then refinance with the amazing amound of equity we would have. I didn’t believe it — I’m stunned that so many people did. I do hope to own a home someday but when the timing is right for us professionally, personally, and financially. I really think one of the things that went wrong with the housing bubble was that people felt rushed into home buying and didn’t take the time to really consider the purchase on a practicle day to day level (upkeep) and financially. I’m happy renting for now and when I lend an ear to friends who are upside down, had their mortgage payments double, or are facing forclosure I sympathize, but am also very glad I made the “idiotic” decision to rent.

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Adam

Thanks for this article. I come from a real estate family, and despite getting my Masters degree in finance and having a 6 figure salary at a young age, investing regularly and living well within my means, I am the black sheep for not owning a house.

I have lived abroad, including 3 years in Bermuda and four years in Montreal, and have never in my life lived anywhere for more than 4 years. I love to travel and live in new places. Buying a house would anchor me down and make me settle. Yuck! I’m hoping for a transfer out to Australia or London next year.

This does not mean, contrary to my family’s belief and seemingly every PF book I’ve read, that I have no savings or net worth and will be forced to live my retirement under a bridge or with no quality of living. I am saving nearly 30% of my gross income every year and investing it diversely in tax sheltered index funds, bond index funds, and in good old fashioned ING savings for my EF.

Renting makes sense for some people!

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Luke Hartman

I’m firmly in the buying camp. My wife works and we don’t live off her income (gives her a sense of freedom). We’re in our early 30s and have paid off our house. We don’t plan on paying rent or mortage the rest of our lives. There’s a strong sense of satisfaction with that that we could never get either renting for life or buying more of a house than we need. It’s nice to not have to plan on appreciated rent when we retire. We can do something else.

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Krista

Something that often gets overlooked in this equation is rent control. If you live in an area where laws cap how much your rent can increase every year, then that adds a huge security element to renting. But if you’re not that fortunate, then renting can be quite risky – just as risky as buying and being responsible for maintenance costs.

In my current area, there’s no rent control. My landlord could choose to triple my rent tomorrow if she wanted. And when I first moved here, that was a very common occurrence in rental apartment buildings when the landlord wanted to convert to condos. A lot of low income people (mainly single parent families and seniors) were made homeless by this practice.

I rent, and I’m happy to, but I find people often make renting out to be totally carefree, when usually, that’s not the case.

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kaitlyn

My life keeps taking me to live in high cost of living places. My rent is $1500/mo for a tiny one bedroom. If I make the move I’m looking at, it’ll prolly be about the same. I’m priced out of owning a home right now.

There’s no rush for me, though. The only places I could afford would be in some suburban area somewhere in the Midwest. I’m not ready to give up city life yet.

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Sarah

I’m one of those people for whom buying a place makes no financial sense at all. I pay $1600 per month in rent, and I’ve priced similar condos to buy – my payment would be about $2500 per month even in a cheaper neighborhood AND I’d have to spend all my savings as a down payment. That makes no sense to me.

Add to that the fact that I’m early in my career and want to keep my options open for moving, that my husband is talking grad school (moving), and that I live in a city 1000 miles from my nearest family. I love it but I’d hate to feel stuck here.

The whole “forced savings” thing is kind of silly because I save plenty, and I keep it in a bank that’s FDIC insured, not in a house whose value can drop at any time.

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Beth

Buying was the right choice for us. We like having control over our living space. The key difference for us is that we are (as Dave Ramsey says) living like no one else right now so that in 5 years we will OWN our home outright.

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Kevin M

I agree with you JD, I used to think ownership was the only way to go, but I’m older, wiser and can see benefits both ways. But – one thing that never seems to be mentioned is that a mortgage is built in inflation protection. Unless you have rent control, the same cannot be said for renting.

Our mortgage right now is about $1,050 and it will be until we pay off the loan in 30 years (or earlier like we plan). Our taxes may go up, but that just means the value of our home is going up too.

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Jason T

I’m a little confuesed by you stating that these myths it appears that you are “pro renting”. These 3 items are only myths for some ill informed people, while are reality for others.

“The housing industry is huge, and it spends a lot of time propagating certain myths about homeownership, myths like:

•If you rent, you’re throwing your money away.
•Owning your home is a forced savings plan.
•Home ownership is a path to wealth.”

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J.D.

Just to be clear: The bottom line isn’t “buying is better” or “renting is better”. It’s “do what works for you”. If you can afford a house and want to live in a house, then buy a house. But if can’t afford a house or you’d rather rent, then rent. Either option is fine. What my research has shown — and let’s be clear that this isn’t necessarily “trendy” research as some are saying, since much of it is based on bubble-era articles — is that neither option is superior to the other; it just depends on your goals.

And while I hear what people are saying abut renting make more sense of tenants have the discipline to invest their savings, I still think it can make sense even if people don’t do that. If renting is cheaper, then investing the difference is great, but even if you don’t, you’ve improved your cash flow so that you can spend the money on other priorities. One example I keep using is that of Chris Guillebeau. He rents (and doesn’t own a car) so that he can have extra cash to travel all over the world.

I live in Brooklyn, NY, and I cannot see myself buying a home, condo, or co-op here. I’m simply not interested in owning a house at this point of my lifeI, and properties are very expensive here. like the freedom of renting an apartment. If I get an irrepressible urge to own a home, I’ll probably move upstate or out of state.

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Jason

Interesting point of view. With your ratio calculations I didn’t see an adjustment for an increase in market value of the home? Regardless of the real estate bubble.

I don’t mind paying monthly a little more than I would to rent someone else’s house. After taxes, I come out ahead. It’s all about mortgage planning. Some people purchased when they shouldn’t have.

I love the fact that in 20 more years . . . I won’t have to pay rent or a mortgage. I could even pay rent somewhere else and rent out my place and receive a steady income. Maybe even invest now in a few more properties to do the same . . .

I have another reason to not jump into a house, and that’s the cost of changing your mind. You can always leave an apartment at the end of a lease, but there are significant costs to changing homes.

I bought my l’il condo in December, 2003. There were exactly 3 places in Chicago that met my criteria. I did get a great deal, and got a place in an up-and-coming neighborhood so that the value has risen nicely.

However, at the time I compromised on a number of things, thinking that I could always sell and buy a different place if I really didn’t like it. Fast forward 6 years and guess what? If I don’t want to move to a different area, I won’t get anything better for the money than I already have. The costs of real estate agents and moving and closing are prohibitive. So I’m not going to change places.

The moral of the story is: when you buy, there are some pretty significants barriers to exiting the place you choose.

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Jason

This analysis has been done time after time. I’m going to somewhat agree with Kevin on this in that you would want to buy if you are going to stay somewhere for a while (five years or more) and rent otherwise. You can thrown numbers at the game, but really you can pretty much pick and choose to make your decision look correct.

I also feel that this analysis is a bit “trendy”, given the current real estate market — which is indeed in a slump for sellers and contractors. But it’s in GREAT shape for people who are wanting to buy a house. For the “buy a house” part of the entry, you analyze numbers since 1926, saying that homes have beaten inflation by one percent. In the section on renting, it’s all based solely on “now” numbers. How much have rents increased since 1926? I’m betting that rents have increased more than mortgage on that same house in 1926!

All that said, it really does come down to how you want to live your life, and what stage you are at in that life, as well as where you live.

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Libby

My P/R ratio is 11. I just bought a home for less per month (and I didn’t put anything down really – yes there really are still ways to do this) than the comparable rental in my neighborhood. I guess its actually about $50 more when you add in the HOA fees, but still, very similar to renting, in an area of the country that has very high home prices and high renting prices (northern VA – metro dc area). But there were a LOT less headaches when renting. I’ve owned the house for less than 6 months and replaced the entire piping system, entire HVAC, sump pump, redone the entire basement because it flooded from a failed sump pump, etc the list goes on. My budget now includes a line item for the home depot because I go there so much. I personally like doing projects, but my Fiancee is not so happy about it. Hopefully one day we will be “finished” with all of the upgrades I want to do.

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Joe

I love the blog, but I have to disagree with this.
I am a landlord of 3 properties myself, but renting where I live at the moment (weird situation) so I know both sides of the story. I am looking to buy somewhere within the next 6 months and for some very good reasons.

Right now my rent is 25% of my income. Assuming I never moved, my rent would increase each year and my rent would always be 25% of my income or thereabouts.

However, buying a house today for £300k my mortgage would be 30% of my income. However… in 10 years time my wages will have risen with inflation but my mortgage will be the same. After 25 years I wouldn’t have a mortgage at all.

Also, while growth of house prices may be the same as inflation, all £300k of my house is growing but I will have only put £100k as a down payment, so I’m getting growth on another £200k. I could put a smaller down payment and increase the leverage.

If I pay off my mortgage in 9 years (which I plan to) then no one can ever take my house away if I lose my job. I then only need to take a very low paying job to cover property tax, gas, electric and food. If I continue renting however I will have to fund the rent from somewhere else and could end up evicted as a low paying job would not be enough.

Renting is good for some people in short term scenarios or if they move a lot or can’t afford to buy in a nice safe neighbourhood. I love people that do chose to rent as they are funding my retirement fund but for most people, especially people reading this blog I can’t imagine it is the right long term choice for all but a very small percentage of people.

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captainhurt

you never really OWN a house in the common sense of OWN, esp while the bank has rights to it. After finally paying the bank up to twice the house “price”(yep, interest), yes, it can still be taken away.

the government can take your house away.
natural disasters can take your house away.
fire can take your house away.
termites can take your house away.
a medical issue can take your house away.
a spouse can take your house away.
a bad title can take your house away.
These and more CAN AND DO take “paid off” houses away.
but if you sleep better, forget i mentioned it. 😛

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Peggy

Owning a house is one of our long-term goals, but it is not our top financial priority. We got out of debt and started having kids and saving for retirement first, and our next goal is to replace our almost-outgrown car.

It’s difficult to rent long-term when you are really a homeowner at heart, but it has been one of the best financial decisions that we’ve made.

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Stacey

The rent-buy decision really depends on where you live. We wanted to live outside of town, and our only choices were to rent an apartment for $1000 a month or find a smaller house. We’re paying less on the mortgage ($900, including taxes) than we would to rent – and one day, the mortgage will be paid off and we’ll only be paying taxes.

There are two types of senior citizens in our town, the renters and the home owners. Both types are struggling right now, but once you’re retired the difference between owning your home and paying for rent can be HUGE. Yes, you’ll have to fix the roof when it leaks. Yes, that broken toilet is your problem. But it’s much easier to “make due” and survive if you don’t have the threat of next month’s rent coming due. A new roof costs $5,000 one time… but paying $700 in rent costs $8,000+ each year. If you don’t think you’re “paying” for that roof or repair, think again. 🙂

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Alexandra

I want to reiterate the point that having a mortgage is forced savings.

I have many friends who rent rather than own, and their monthly costs are definitely lower than if they had bought a home or condo.

But, with only a single exception, they do not save the difference, and this is the downfall of renting when you don’t have the discipline to invest the difference in costs. They blow the extra money they have on clothes, going out, cars, their lifestyle. In the end, they would be better off buying a home, because they would have something to show for 25 years of housing costs, aside from old clothes, hangovers and “good time” memories.

And I think that a lot of the articles that are now extolling the virtue of renting over owning, are missing the fact that people are only getting half of the equation here. In order for renting to be better, you need to 1) rent and 2) invest the difference between what your rent costs and what home ownership would cost.

IF you lack the discipline to invest or save the difference between what you would pay in rent, and what you would pay for a mortgage on the equivelant property, then you are better off buying a house and using your mortgage as a forced savings plan.

And sorry to say, I would guess that the MAJORITY of renters out there lack the discipline. GRS readers are the exception, not the rule.

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Alain

Very interesting post Alexandra. I totally agree that buying a home is forced saving. But the way you decide to spend your extra money (if you rent) is just a personal choice. You can invest or party or get a nice car. All choices are good if that’s what you want. I’m somewhat a saver and have had a home/duplex for about 20 years. Financially, it’s pretty good, but must admit I’ve put a lot of money into this house. If I could find a stable place to rent, maybe move in with a friend, I would consider it. A lot of responsabilities gone; repairs, bills, renos., maintenance and other. To me, the biggest downside of renting is that you can’t do anything you want in your home. I believe either way is good; it just depends on your priorities and interests.

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Red

I’m always listening to friends tell me that renting is “throwing my money away.” But, for me, renting almost always makes more sense. For one thing, I’m given the freedom of moving when I need to, without worrying about listing and selling a home. As a college senior, it’s very important because I’m not sure where my career is going to take me. Another thing is that if D or I lost our jobs, we could afford the rent on one person’s income. However, to afford a mortgage on our own would be very unrealistic at this point. (We have cheap rent – $460 each month.)

Also, I’ve looked at homes in our area, and almost all of them would be just too large for our needs. I wouldn’t want to buy a one bedroom/one bath home (for resale purposes), but that’s all the space we need. A lot of people buy a large house and then spend tons of money to fill up every room with furniture, even if it’s not going to be used frequently enough to warrant the expense. I’m not interested.

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joruva

My P/R is 35! I am happy to rent for now.

I also plan for extended travel after my contract ends, which would be very difficult to do with a mortgage.

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SF_UK

I’d like to buy somewhere (and I can afford to at the moment), particularly as 1-bed unfurnished rentals are not easy to come by where I’m living right now (I have a flat’s-worth of furniture in storage), and it’s as economic to buy as rent in my area.
However, I’m seriously considering whether I should continue renting when I finish my PhD, as I don’t know for sure if I’m going to be staying here long term – I want to stay in academia and short-term contracts are the norm for early career academics. Once you factor in the costs of buying and selling, renting is way cheaper if I’m going to move towns every couple of years.
As far as I’m concerned, if I buy a house, I’m not buying it as an investment, I’m buying it as a place to live in. Controversial I know…

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ami | 40daystochange

Renting looks more and more attractive to me. Most of the rent vs. own calculators (esp. those shared by realtors) seem to focus on the equity build vs. “throwing away rent money” aspects, ignoring the costs of repair, yardwork, utilities, etc. – many of which can be substantial, and many of which are included in the rent. Owning makes moving or going on long trips more difficult.

There is some peace that comes with paying off a mortgage. But even then, housing expenses/headaches don’t end, they’re just reduced.

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lostAnnfound

“If I had it to do again, I’d never buy this house.”

My husband & I say this often enough. It’s great to have our house with our own yard. We have a pool for the kids & the dog has the run of a fenced in backyard (something renters have to take into consideration if they have pets is that the majority of rentals do not allow animals) and a small (very) garden. It is the only home our kids have lived in.

But, we have been thinking that in a few years when the kids are gone, we’ll probably sell and go back to renting, knowing what we know now about the true cost of being a homeowner.

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Kevin

This argument has been made many times, and if the end result is usually the same: If you’re planning on moving around a lot, renting is better. If you’re planning on staying put for many years, owning is better.

The thing is, there’s a good chance that someday you’ll be 65 years old. And you can either own your own home by then, or be facing $3,000/month in rent (which is what it will be by then, adjusting for inflation). The nice things about a mortgage payment are that it doesn’t grow with inflation, and someday you get to stop paying it, completely.

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Nathan

I certainly agree that in some places renting can be a financially beneficial scenario. Where I live my mortgage payment is the same as renting a comparable apartment and in 15-years when that is paid off I will have that additional $1,000/mo freed up to either save/invest (that is just the P&I, I will still have taxes/insurance). I remove the Housing piece from my monthly expense equation.

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gina

I’m not convinced that renting is the way to go. In the next few years, if we have hyper-inflation, all other costs (including rent) are going to go up while the (fixed) mortgage will stay the same. It wont’ make one rich, but it seems it might help you not get into a bigger hole.

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Stephanie

Thank you for this post. My husband and I have been renting for years and will continue to do so for several more. We love renting- the simplicity, the low cost, the freedom. Also, with no children (and no plans to have any) many of the needs people associate with houses (yard, extra room, etc.) simply don’t exist for us.

I too grow weary of everyone giving me the ‘throwing your money away’ speech. The way I see it, I’d rather spend my weekends out riding my mountain bike and visiting friends than buying endless stuff at Home Depot and constantly having to fix my abode.

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Brian B

Very interesting post. In our area (London, Ontario, Canada), renting a three bedroom house was somewhere in the $1000 to $1500 range. My wife and I were renting a one-bedroom apartment for $720 a month (plus utilities), when our house came up for sale. Our mortgage is approximately $1000, including property tax. It seemed to make sense. I love that we have a house now. I have such a sense of pride and accomplishment that renting didn’t give me. I felt great this past spring (our first in the house), planting grass seed and spreading dirt, fixing the uneven lawn that was driving me nuts!

I wouldn’t go back to renting.

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Greg

Great post. My wife and I rent and are in no hurry to purchase a house. While maybe some day I’ll look forward to home ownership. It’s not at the top of my agenda. I like the fact that I can funnel my money to other investments and am starting to create additional streams of passive income as opposed to having to pay for the additional costs of having a house like insurance and repairs. This is a good analysis of renting vs. buying.

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wanzman

It seems that I have seen this same thing written on a number of blogs lately. Since housing prices are not increasing 10% to 20% a year currently, now all of a sudden everyone thinks buying a house is a bad idea.

It is this very same rationale that causes people to buy houses and other things (such as stocks) at the very top of the market, and sell precisely at the bottom.

Everyone wants to buy something when it is very popular, and then sell it when it becomes unpopular.

To become wealthy, you need to do exactly the opposite. Buy when everyone else is selling, and sell when everyone else is buying.

It is for this very reason that I just bought my 2nd property last week (I am only 25). I bought a condo for $37,500 that I already have rented for $650 per month ($7,800 per year). That gives me a P/R ratio of 4.8. Yes, 4.8.

It seems like when a really bad market condition comes along, people always think that now the game has finally changed. The only thing is, the game hasn’t changed, and it probably never will. Human behavior is very predictable and human behavior drives the financial markets.

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Jeff

Yes! And I must add that if you financed this home for 25% down (which is standard for investment properties where I live) then an annual appreciation rate of 3% or so is astounding! Let’s say you put up 30% of the purchase price to close. You’re actually making 10% off your money when the market goes up at the rate of inflation. My trick is to buy where the cash flow is a few hundred per month after I have financed the property. That way I have the cash flow to cover maintenance and vacancy, but my ROI from appreciation is still excellent. I found a great property last year which I closed on for 16% of the purchase price and the cash flow is $290 per month before maintenance or unknowns(over 10% ROI from cash flow per year).

They are throwing money at us at 4% per year. If you can’t make 4% a year, then by all means pay off your mortgages.

One caveat is that you must be happy about being a landlord. I love helping people. I love owning property. I love being a landlord. I read recently: “If you can’t do something with the happiness experienced by a young child feeding bread to a hungry duck, then don’t do it.”

I guess my point is, there are some great deals out there in some areas of the country right now. If you want to build wealth and like being a landlord, then this is still a great option.

If I wanted to live in an area where the numbers didn’t work out, I would totally rent. When you buy a place, any place, you need to be ready to be a landlord because you never know where life will take you.

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Christine

This is a great article. Thank you for the insight. I’ve read several articles on this topic but this is the best one I’ve seen. Most focus on the financial aspects of buying vs. renting. I like that yours focuses on the emotional aspect.

I am an Air Force brat and also spent my early twenties moving about once a year into different apartments with roommates. I got a great deal on a two bedroom condo three years and I finally felt like I had a home. Luckily, it was also a good financial decision for me, but the feeling of permancy was very important to me.

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Jason

I really appreciate how much money I save by renting in just time usage alone. I’m not paying for the time and gas to go to HDepot (repeatedly), the time to make repairs, and as a DIY learning by mistake is inevitable and at times costly. After owning 3 different houses, a 70’s split level, and two 18th c. farmhouses. I may be jaded and tired, though I have learned a lot. I rent now, and instead of painting the walls, I’m painting landscapes in my free time.

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Jane

I agree that most of the reasons to own instead of rent are not at all financial. I was just thrilled to be able to change whatever I wanted. I was tired of living in places with terrible windows. In general, landlords put the cheapest of everything in their apartments. I frankly don’t blame them, but that doesn’t make it any more pleasant on a freezing cold day when your windows leak. Plus I had a terrible experience with a landlord – one who stole my security deposit and threatened to sue me for damage that I didn’t cause. That made me desperate to find a home. At some point, my husband and I just wanted the permanence.

I also think it depends on where you live. In our area, you would be hard pressed to find a house that would rent for less than $1,000, but our mortgage (with taxes) is only $1,000 and will go down to $800 once we pay off the second mortgage in a few years. That is much cheaper than we could rent the same house for. Yes, we have repairs and other things to worry about, but I don’t think it’s always that simple if you want to rent a house instead of an apartment.

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Meghan

One benefit of renting is that if you are single you can get a roommate to save on costs. I save about $300 a month living in a two bedroom apartment with a roommate as opposed to living in a bachelor or one bedroom. I know sometimes people buy houses with friends to try and break into the housing market (particularly in very pricey markets), but I would be weary entering into such an arrangement with a friend.

Quality of life is definitely important. I live in Toronto where $200,000 will get you a one bedroom condo in a less than desirable neighborhood or really far out in the suburbs. If you want to live closer to downtown and be able to walk to shops and take the subway then you are looking at at least $275,000-300,000. And that’s just for a one bedroom condo (usually with high monthly fees).

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lh

I came pretty close to buying a few times before I figured this out, and I’m really glad that I didn’t. I don’t envy any of my friends who are upside down on their mortgages and stuck wherever they are, but even ignoring the bubble/burst effect, ownership isn’t always that great of a deal over the long haul. It’s just amazing to me how well entrenched the American ideal of homeownership is — to the point that most people won’t even read or understand an article like this one. Just watch, within hours there will be comment after comment on here baselessly attacking the idea that renting could possibly be cheaper.

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Anna N.

I appreciate this. I rent, I plan to keep renting for a long time, and I get very tired of friends and coworkers giving the whole “throwing your money away” crap. I certainly don’t think renting is throwing my money away. Since I have no idea where I’ll want to live in five or ten years (I’m planning to move sometime this year, but I don’t know if I’ll want to stay where I’m moving to), buying a home would be a terrible idea, even if I remotely had the money for it. Which I don’t.

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Michelle

I get sick of hearing that too. I always tell my home owning friends that the little extra that I pay on rent compared to their mortgage is worth it… to have mobility in this job market, and to NOT spend my free time doing yard work and home repairs. My fiance and I have a good amount tucked into our retirement plans, more than the amount friends claim their houses have “earned”, and they’d be lucky to get that…

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Writer’s Coin

I’ve been starting to lean in this direction myself. Our house hunt has gone nowhere fast. But so many of the expenses that come with owning are “built in” to the rent, and that flexibility of being able to move whenever we want is fantastic. New roof? Sucks for the landlord, not me. Busted toilet? Landlord’s call.

I still want to own, eventually, but it probably won’t be for financial reasons.

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gail vaz-oxlade

JD, take heart. I know the editing process can be brutal. Each of those sentences, and each of those thoughts are like children… you create them and you want them to live on. I’ve worked with crappy editors (yes, there are some) and really good editors. The woman I worked with on Debt-Free Forever was FABULOUS and made the book better. And that’s what you’re aiming for… a perspective that will bring you closer to what will help your readers. If you feel like hissing and spitting, then build a representation of your editor in the snow (do you have snow?) and beat it with a stick. Then go back inside and follow the edits. The best of luck to you with the book. I hope it’s a HUGE success and that people flock to it in droves.

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Twiggers

I’ve done both, and am currently stuck with a house I am renting because it won’t sell. I probably won’t buy again. We are just not the home ownership kind of people. We don’t like yard work, we don’t like doing home repairs, etc. We also don’t like spending money on the house…I would rather do other things with my money. It was an expensive lesson to learn, but we have realized that we are just not home owners.
Also, after being stuck in a house with really bad neighbors (I’m talking the SWAT team being at their house on a monthly basis, etc.; gotta love regentifrication) we like the ability to just get up and leave if we don’t like where we live. You can’t do that with a house.

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Mrs. Money

A lot of the time I wish we were still renting. We bought this house and have been doing tons of work to it (pretty much me all by myself!). I am hoping that we’ll come out ahead when it comes time to sell. Our realtor seems pretty optimistic, but we will see!

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